Kit Juckes, Head of FX Research at Societe Generale, on the US Dollar

The Dollar has been weak since the end of August, when the Fed Chairman Ben S. Bernanke made it clear that further quantitative easing was in the pipeline, and there were increased incentives for US investors to move money overseas. This will remain in place over a very long term. However, in the short run the US Dollar has fallen too far. If we continue to be concerned about economic slowdown in China and across Asia, and if we see renewed concerns about situation in Europe, I suspect the Dollar will enjoy a period of relative strength over a course of, perhaps, next month or two.

I am sure that it will certainly happen. The question is whether the market can buy the rumour and then buy the news and keep on buying, which has been the pattern recently. I suspect that if we see Spain requesting a full bailout, this will probably signal the end of the Euro's current rally. EUR/USD has moved from nearly 1.20 to 1.30 give-or-take. I think EUR/USD is pretty close to a peak for the remainder of this year. The bailout will be asked for, it is not going to be straight away, but it is now priced in. It will not solve the underlying structural problems in Europe, and it will not save the Spanish economy. The major focus on the risk, whether Italy will be asking for a bailout, will be somewhere down the road. 

The fiscal cliff is self-induced cliff in a sense that Republicans insist on that the debt ceiling not be increased without spending cuts equal to or greater than the amount of the debt limit increase, while avoiding raising taxes. Whereas, Democrats are looking for a combination of spending cuts and tax increases. At some point some kind of compromise is necessary. But the effect of the fiscal cliff and fears surrounding it is that we are likely to see a renewed phase of concerns about downside risks to economic activity and concerns about downside risk to asset prices; and the Dollar safe haven status then is likely to benefit. I would expect the Dollar to not be a beneficiary from growing concerns about fiscal cliff for a while at some point later this year.

Our current forecast is 1.21. It has been 1.21 for quite a long time, thus it looked as if it was too high when the Euro traded at $1.21, and it seemed as if it was too low when EUR/USD was at 1.30.