Differing outlooks also are seen for the U.S. dollar in light of European developments and recent Congressional testimony by Federal Reserve Chairman Ben Bernanke. “The dollar is much lower than it was three months ago and also the prospects of easing have soured sentiment toward the dollar index,” says Andrew Wilkinson, chief economic strategist for Miller Tabak & Co. LLC. “I would say that the stage is set for a weaker dollar and a stronger euro.”
But he adds that fears of a weaker dollar should not be overestimated and that the euro does not deserve to be fundamentally much higher. “It’s really a question of positioning at this point. A lot of people are losing money from failing to adjust to the reality of the ECB wrapping its arms around the Eurozone financial system.”
Frey notes that the prospects for the dollar began to change with Bernanke’s testimony. “There were a great number of participants that were banking on seeing some form of QE3 relatively soon and Chairman Bernanke poured cold water on that idea,” Frey says. “He really gave us the sense that there is no further monetary stimulus coming our way and, if anything, we likely will continue to maintain low interest rates at the current level until 2014, which already has been forecast in the market and already has been very well communicated.”
In light of the market’s prior expectations for further monetary easing, that is a positive development for the dollar, Frey says. “If the overall economy begins to firm and the U.S. economy gets on the right track again, if the unemployment rate [continues] to dip down and the housing market begins to firm, those are big positives for the overall economy and big positives for the dollar” he says. Frey adds that if the Fed also doesn’t continue to expand its balance sheet, that is positive for the dollar as well.
“I am still looking for further gains in the greenback as a gradual U.S. recovery makes the dollar more attractive than the euro, which will experience ongoing strains in the coming year,” Lien added.