Forex is changing medium term FX dollar forecast to reflect the prospect of even greater dollar weakness. This implies a further 10 per cent dollar depreciation with most of the pressure felt against the euro.
The changes (relative to already bearish US dollar view) are based on:
1. The heightened risk that the US pursues unconventional policies to combat the risks of deflation. All of the alternative policy measures would risk undermining the dollar forecast, perhaps severely;
2. The signs that global asset managers are showing an increased preference for the euro relative to the dollar. The dollar sales against the euro seen recently have largely been medium term in nature and are unlikely to be quickly reversed. The recent fall in the dollar does not, therefore, indicate a speculative excess that will soon unwind;
3. Official policy, to the extent that it was ever important, will clearly not resist further dollar weakness and euro strength. The US appears intent on using all policy tools in an attempt to stimulate growth, and European officials do not (as yet) see euro strength as a major problem.
In fact, to the extent a higher euro helps cut inflation and allows the ECB to cut rates, it may be seen as beneficial for the Eurozone. The Japanese position is entirely different. The Japanese authorities are intent on trying to prevent yen strength through intervention. This is likely to continue, though forex dollar forecast would not expect continued intervention at a fixed level whatever was happening to the dollar elsewhere.
The new dollar forecast implies a further 10% trade weighted dollar depreciation from current levels, with most of the pressure being felt against the euro.
U.S. Dollar posts gains against Euro. The dollar rose against the euro after data showed U.S. industrial output posting a solid increase in last time.
In late trading in New York, the 12-nation currency bought $1.2095, down from 1.2129. The British pound bought $1.7664, down from $1.7758.
The dollar bought 115.51 Japanese yen, up from 114.19; 1.1634 Canadian dollars, up from 1.1612; and 1.2806 Swiss francs, up from 1.2769.
The euro rose as high as $1.2143 as inflation numbers in Germany, Europe's largest economy, underlined recent European Central Bank indications that interest rates were more likely to rise in the future.
However, the dollar came back after the U.S. Federal Reserve reported that production at the nation's factories, mines and utilities rose by 0.6 percent last month following gains of 0.8 percent in November and 1 percent in October.
The three strong months represented a recovery in industrial production following a 1.3 percent plunge in September that reflected widespread shutdowns of oil wells, refineries and chemical production in the wake of Hurricane Katrina.
To believe that a collapse in the value of the dollar is not likely, but the risks of a sharper-than-forecast depreciation are rising. Exchange rates tend to overshoot in volatile market environments, and large, unpredictable swings could yet occur this year.