The dollar will be somewhat stronger over the next six months, though the currencies that it appreciates against the most may change depending on market developments.
If US economic data continues to improve, the idea that the Federal Reserve may begin tightening its monetary policy will continue to gain steam, and this will see the dollar strengthen relative to those currencies where central banks are [keeping interest rates low].
Even if US growth weakens, the dollar may do well as US policy makers have begun to tighten [spending plans], while elsewhere, particularly in Europe and Japan, the opposite is likely to happen.
And, if global growth disappoints, the appetite for riskier assets is likely to suffer, which also tends to favour the dollar.
If the US is doing particularly well, the dollar will appreciate more against the Japanese Yen, British pound and perhaps the Swiss Franc. But if US growth proves weaker and asset markets go into a defensive mode, then the dollar may actually weaken against the Japanese yen and appreciate the most against the Australian, Canadian dollars and emerging market currencies.
The euro is expected to weaken to 1.15 in the coming 12 months. In the near term, we may see the market selling Euro when it rallies significantly above 1.30, while 1.20 is a major support level that may prove difficult to break for some time.
- with John J. Hardy, head of FX Strategy, Saxo Bank:
The euro entered 2013 on a sure footing but the larger problems in the eurozone have not disappeared and economic weakness and political uncertainty are weighing on the single currency.
The European Central Bank (ECB) is clearly worried about continued economic weakness and slowing inflation and might lower interest rates in the next few months. Social and political instability in the eurozone is undermining efforts to resolve the financial crises. With significantly elevated unemployment, the risk of a political backlash and the rejection of structural economic reforms and austerity packages, is high.
However, the ECB is disappointed by the lack political progress on economic restructuring in many countries and is not likely to support governments that are not willing to implement reforms. Worryingly, Germany [which has effectively been bankrolling the Eurozone through the crises] will go to the polls in September, with anti-bailout candidates gaining ground.
It is likely the euro will slowly be ground lower against the dollar, as the deterioration in the economy and interest rate cuts send investors searching for safer, higher yielding investments than the single currency.
- with Peter Rosenstreich, chief FX analyst. Swissquote Bank
Sterling has been one of the worst performing major currencies in the year-to-date, in part because of the loss of the UK’s cherished AAA sovereign investment rating, but more due to the deterioration of its economy overall. The UK appears to be on course for a triple dip recession, with manufacturing and construction stuck in recession.
The Bank of England (BoE) has very few options left and may be facing a policy vacuum until the new Governor Mark Carney takes office in July. For now, in the face of inflation that is already above target and low growth, the current BoE Governor, Merwyn King, appears to be encouraging weaker sterling.
In the face of ongoing economic weakness David Cameron’s future as prime minister – and his austerity programme - is also starting to be questioned. The last time politics and economics intertwined to depress sterling was around the last election, when it fell to 1.42 to the dollar in 2010. This level could be revisited, with volatile politics again acting to further weaken UK economic fundamentals.
- with Tim Fox, head of Research and chief economist, Emirates NBD
The Indian rupee started the year on a positive note due to a host of reforms initiated by the government to contain its fiscal deficit; including reducing diesel subsidies, selling stakes in state enterprises, opening retail and aviation to foreign direct investment and taking steps to curb gold imports. Quantitative easing by the US and Japanese central banks, to stimulate their economies, have led to robust investment flows into emerging markets.
After the recent Indian budget announcement, the rupee lost some of its gains as the spending plan disappointed investors. But, sentiment has started favoring the rupee again as the fiscal deficit is projected to fall along with inflation, providing room for a further cuts in the interest rate, that could help revive growth. However, the implementation of economic reforms and interest rate decisions by the Reserve Bank of India will influence the movement of the currency.
In next six months rupee is expected to appreciate towards between Rs52.70 and Rs52.90 to the dollar - and is not expected to go below 55.50 – because of continued foreign direct investment and income from the sale of shares in state enterprises.
- with Hemal Doshi, chief currency strategist, Geojit Comtrade
Pakistan’s rupee hit a record low of PkR98.20 to the dollar in February after a speculative run caused by concern that it would not be able to meet a repayment of $2.8 billion due to the International Monetary Fund (IMF). The rupee has recovered somewhat because of the active intervention of the Pakistani central bank and the present surplus in its current account, but the volatile political and security situation will prevent any meaningful foreign direct investment. The country is scheduled to go to the polls in May and there is likely to be fiscal profligacy in an election year.
Over the next six months, pace of depreciation of the currency is expected to increase as the central bank does not have the reserves to support the rupee any more and the dollar is strengthening against other currencies. The rupee should trade in a range of between PkR 102 and 104 to the dollar over the next six months.
This could be influenced by Pakistan’s entry into a second round IMF program, which should result in an inflows of foreign funds and by efforts by a new government to attract investment into the telecommunications and energy industries.
- with Anum Dhedhi, Economist, AKD Securities Ltd
South African rand
The rand has depreciated by around nine per cent against the dollar since the beginning of 2013, because of increased social instability and labour unrest in the country, as well as weak economic growth, a growing fiscal deficit and investment rating downgrades by the major agencies. If the bad news continues the rand could test R9.50 to the dollar in the coming six months.
However, there have been economic reports saying that the sell-off of the currency has been overdone. South African interest rates are still high compared to Europe and its growth prospects are slightly better. The weaker currency could also boost its export competitiveness.
-with Michael Kadouch, Head of sales, treasury and trading, Union Bancaire Privée
Despite expectations that the Philippines peso will appreciate in the coming months, it is expected to close above PhP40.00 to the dollar by the year-end. It might however occasionally strengthen to below PhP40 if the country is granted a much-expected investment grade by at least one of the major ratings agencies within the year.
Weighing on the peso’s appreciation may be demand for dollars as inventories of components used in exports have been drawn down throughout the year. Foreigners also remain reluctant to put their funds in the country and total foreign direct investment for 2012 is embarrassingly low, with a month’s worth of remittances outpacing the flow of investment into the country.
A rebound in imports in 2013, due to investment from locals, would help the economy by keeping the sharp appreciation of the peso in-check, as well as creating jobs to the unemployed.
with Emilio Neri, Jr, Economics and markets research officer, BPI Asset Management and Trust Group