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'Good News’ to Drive Dollar Bull Run – at Last

Monday, 11 Mar 2013 | 1:43 AM ET
Why U.S Dollar Strength is Here to Stay
John Horner, FX Strategist at Deutsche Bank, is bullish on the U.S. dollar. He believes recent U.S. data such as the non-farm payrolls and ISM manufacturing figures will lead to continued strengthening.

Strong U.S. jobs data have given the dollar a leg up in the forex market, suggesting that an improving outlook for the world's largest economy is taking over as the main driving force for dollar gains.

The dollar index, a measure of its value against a basket of other major currencies, touched a seven-month high on Friday after data showed the U.S. economy created 236,000 new jobs last month. The dollar held on to those gains in Asian trade on Monday.

(Read More: US Job Creation Surges as Unemployment Falls to 7.7%)

"For the first time in a number of years stronger U.S. data are leading to a stronger U.S. dollar after a dynamic over the previous couple of years where good news, no matter where it stemmed from, led to dollar weakness," John Horner, currency strategist at Deutsche Bank in Sydney said on CNBC Asia's "Squawk Box."

"We are seeing a multi-year trend in the dollar which will see it have broad-based gains against other major currencies as well as emerging market currencies," Horner added.

Dollar Index One-Year Chart

He expects the dollar to rise to 100 yen later this year, adding that dollar strength will push the euro to around $1.20 and sterling to $1.41 by the end of the year. That implies a fall of almost 8 percent for the euro and just over 5 percent for sterling from current levels. The overall dollar index has risen about 3 percent over the past month.

That move has coincided with stellar gains in Wall Street shares, which analysts say are contributing to the changing dynamics behind the dollar's performance. The Dow Jones Industrial Average is up about 10 percent this year compared with gains of just over 5 percent in European stocks and almost 4 percent in Asian equity markets.

(Read More: Why Dow Record Could Be Good News for the Dollar)

"The dollar is the best currency among a sad group [of currencies] and that will continue as anticipation of strength in the economy grows," said Warren Gilman, chairman and CEO of investment firm CEF Holdings.

New Trend

Image Source | Getty Images

Analysts say the strong U.S. economic news is infusing a new force into currency markets.

In fact the payrolls numbers are the latest in a string of data painting a brighter picture of the U.S. economy: The number of Americans signing contracts to buy new homes rose in January from December to the highest level in more than two and a half years, while the pace of growth in the manufacturing sector picked up to its fastest rate in more than a year and a half in February.

Westpac Bank described the rally in the dollar following Friday's jobs data as a "textbook example of the changing relation between the dollar and economic news."

"This is of course the historical relationship but was very frequently reversed during the GFC [great financial crisis] and years since, where the safe haven dollar usually weakened on positive U.S. data surprises," Westpac analysts said in a note on Monday.

"We have seen price action such as Friday's at times in the past year or so without being consistent, so it is too soon to be confident that the correlation has shifted sustainably," they added.

Still, Horner at Deutsche Bank said that with a gap growing between the outlook for the U.S. economy and other major economies, the direction of the dollar was clear.

"One of the key reasons things have changed for the dollar is the clear disparity in the U.S. economic outlook and what's going on in Europe, which has a poor outlook for a period to come, and Japan where we have a more aggressive monetary policy coming through," he said.

- By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC

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