The Dollar is likely to rise more against the Euro and the Yen than other currencies in 2017, say advisory service Capital Economics.
This is because the Euro and the Yen are particularly vulnerable to devaluation compared to other currencies due to their central bank’s monetary policies, writes Capital’s John Higgins.
Both the European Central Bank (ECB) and the Bank of Japan (BOJ) have a policy of printing money to help boost growth in their economies, however, this also has the effect of weakening their currencies.
The US Federal Reserve (Fed), on the other hand, has now stopped money printing and has started to raise interest rates instead, which has the effect of strengthening its currency.
Higher interest rates tend to attract more capital from foreign investors hungry for higher rates of return.
At the moment, the members of the Fed’s monetary policy committee expect that they will have to raise interest rates by 0.25% three times in 2017, however, capital think they will eventually have to increase rates at an even faster pace than they or financial markets currently expect.
“Where we stand out from the crowd is in our view of monetary policy in the US. We expect the Fed to hike interest rates by far more than appears to be priced into the markets.
“We are less out on a limb when it comes to our view of monetary policy in the euro-zone and Japan.
“We share the view of many that policy rates will still be at, or close to, their current levels come the end of 2018 and that the ECB and BoJ will pursue unconventional policy easing for the foreseeable future,” said Capital’s Higgins.
Capital’s previous forecasts for the Euro to US Dollar and US Dollar to Japanese Yen were for them to be at 1.00 Dollar and 120 Yen respectively at the end of 2017.
These too were based on the same premise that US monetary policy would tighten whilst Eurozone and Japanese policies would remain easy – however, Capital now see the difference as being even “starker”.
The main reason for the new forecast is Donald Trump’s election victory which they see as leading the Fed to raising interest rates even more rapidly – by four times rather than the three times currently expected by the Fed's members and financial markets..
The end result now is that Capital have revised their forecasts for EUR/USD to 0.95 Dollar's to the Euro and for USD/JPY to 130 Yen to the Dollar by end of 2017.