2015: Buy and Hold US Dollar


2015: Buy and Hold US Dollar

The USA is experiencing a strong economic growth while its counterparts in Europe and Japan showed a weak or unstable economic recovery. These disparities will push the US Federal Reserve to hike its interest rates whereas Europe and Japan central banks will need to inject further liquidity to the existing stimulus program already in place to boost the economy and exit the deflation zone. 

Indeed, Bank of Japan is expected to continue its quantitative easing program aiming to achieve inflation target of 2% in order to help the fragile economic recovery. The Japanese Yen already declined suffering from the rating agency Moody’s downgrade of Japan sovereign debt on Dec 1, 2014 and from sales tax hike delay planned by Prime Minister Shinzo Abe’s government.

In the Euro zone, the outlook is gloomy: weak economic reports, high unemployment and low inflation will leave no choice to the European central bank than to keep the euro interest rates very low in order to give currency competitive advantage for the European companies. ECB will then engage in new alternative easing measures in 2015.

The central banks monetary policies divergence will increase the US treasury bonds yields and consequently increase the demand for the greenback whilst investors will get rid of the European/ Japanese assets. In addition, cheaper borrowing costs of Euro and Yen will encourage carry-trade investors to borrow on very low euro/yen interests to buy US dollars dominated assets.

Our 2015 forecast is bearish for the EUR/USD pair and prices decline could reach as low as $1.15.

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