Is the dollar ready to regain its crown as the “King of the Hill” among major currencies? Let’s take a look at three reasons why some analysts think that 2014 might be the “Year of the Dollar”:
1. Taper, taper, taper…
Sure, there may be several factors that could still force the Fed to delay their reduction of bond purchases but the fact remains that the U.S. economy is the first among the major economies to actually consider tapering stimulus.
Consistent gains in hiring towards the latter half of this year have convinced several market watchers that the FOMC is indeed ready to reduce stimulus. However, with inflation dove Janet Yellen set to take the Fed leadership next year, the taper isn’t a done deal just yet. If the U.S. economy keeps churning out impressive figures though, strong fundamentals could keep the Greenback very well supported.
2. Finally, a budget deal!
While the budget impasse and U.S. government shutdown in October dulled the dollar’s shine for quite a long while this year, fears of another shutdown and a potential default have been chucked out the window when the House approved the federal budget deal this week.
This means that U.S. dollar bulls have one less thing to worry about by February 2014, which was supposedly when the debt ceiling deadline would be reached. Now that lawmakers have finally decided to put their differences aside and come up with a compromise for the federal budget, government spending will be limited to $1 trillion and the deficit could be trimmed by $85 billion over the next 10 years.
3. Market analysts say so.
BNP Paribas made headlines yesterday when its currency strategists claimed that 2014 will be the “Year of the Dollar,” citing underlying strength in the U.S. economy as a reason for further gains.
Paul Lambert, who is the head of currencies at London’s Insight Investment, mentioned that relative monetary policy will continue to play a role in forex price action in the coming year. He believes that the Fed officials will continue to emphasize the costs of maintaining QE and might keep hinting at an exit from time to time.
Although currency analysts at French bank Societe Generale pointed out that a dovish Fed rhetoric could keep the dollar’s gains at bay, the U.S. currency will still win “by elimination” as other central banks are open to further easing.
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