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Actually, we do not expect major changes in the Fed's policy, in the sense that the current tapering of asset purchases will continue through the rest of the year. We definitely do not anticipate any rate hikes this year. We believe that the first interest rate increase will occur in the third quarter of 2015. Thus, the Fed will maintain the current tapering with forward guidance policy. As the unemployment rate is falling quite rapidly, we do expect to see all Fed asset purchases being terminated by the third quarter of this year.
If Congress decides to leave the debt limit unchanged throughout the year of 2014, do you think that it might be a potential problem for the U.S. economy's growth?
We do not think that there will be a fiscal policy dispute for this year; however, there might be one later next year. We do not see a recurrence of the fiscal impasse in Congress this year for sure. Thus, there should be no fiscal handicap to U.S. growth prospects in 2014.
What drivers will play a key role in the performance of the greenback during 2014?
When we look at the U.S. Dollar, we also need to look at the other key currencies that trade against it, notably, the Euro and the Japanese Yen. In terms of the Yen, we do see the Bank of Japan easing further sometime around March to April, to counteract the sales tax hike. Therefore, we forecast USD/JPY to continue rising further given the monetary policy divergence between the BoJ, which continues to ease and to expand its balance sheet, against the Fed that is proceeding with the tapering. In terms of the ECB, given the disinflationary pressures in the Euro area, we think that it will be forced to do more in the second half of the year, and this will also help the Dollar against the Euro. However, the dollar move against the single currency will be more muted in the first half of the year. But all in all, we expect the Dollar to gain against both the yen and the euro over the course of this year.
What are your forecasts for EUR/USD and USD/JPY for the end of Q1 and end of the year?
For EUR/USD we would expect the pair to end the first quarter at the 1.35 level, so not much of a change from here. Whereas, for USD/JPY, we think the Yen will end the quarter at the 105 level. By the year end we think that EUR/USD will drop to 1.25, while we see USD/JPY at 110.