© Peter Cardillo
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Obviously, rising yields and improving economic activity in the world's largest economy are positive drivers for the U.S Dollar. Although, the greenback has been under pressure recently, currently we are seeing a little bit of turnaround, which to my mind is coming from the oversold condition.
It is widely expected that the Fed will completely scale back QE by the middle of next year. Can we expect a bull run as soon as asset purchases will be tapered?
I suspect that we will begin to see a bull run even before the QE will be completely withdrawn. This is due to the fact that markets always anticipate events, and a retreat from QE has already been priced in. I believe that the Dollar weakness, which we have seen in August and will most probably linger into September, had more to do with seasonal factors. However, once they are over, we will see the Dollar regaining its strength.
When QE is fully withdrawn, what drivers and events then will affect the U.S. Dollar performance versus its major counterparts?
To my mind, that would obviously be the trading balances that are continuing to improve, especially the merchandise trading balance. Moreover, strengthening economic activity will also have a positive impact on the U.S Dollar.
What are your forecasts for USD/JPY and EUR/USD for the short and long term?
I would like also highlight that one of the reasons, aside from seasonal factors, why we have seen this weakness in the U.S Dollar was mostly attributed to the erratic trading of the Japanese Yen. Therefore, I expect the greenback to strengthen, and consequently, the Yen to weaken. I believe, we could see USD/JPY cross trade back at the 1.02 level.
With regards to the Euro, I think the 17-nation currency is a little bit overpriced. Despite this fact, I see the Euro to settle down around 1.29-1.30 in the long term.