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Contrarian call: US dollar to weaken further in 2014

Friday, 3 Jan 2014 | 7:56 AM ET

The U.S. dollar is expected to weaken further next year as the global economic recovery takes hold and the currency loses its safe haven premium, according to analysts at Wells Capital Management.

The greenback has weakened since the summer of 2013 after investors got nervous when the U.S. Federal Reserve initially mentioned the tapering of its unprecedented asset purchasing program and the government shutdown in October created uncertainty.

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But analysts' consensus is that the dollar will see a reversal of fortunes in 2014, gaining strength this year.

However, analysts at Wells Capital Management, expect the dollar to weaken as the global economic recovery takes hold.

"U.S. real GDP growth will likely rise above 3 percent this year and in isolation this would strengthen the U.S. dollar," Jim Paulsen, chief investment strategist and economist, wrote in a note.

"However, most other economies are also experiencing acceleration in their recoveries. And, in most cases, improvements in foreign growth rates are more dramatic and by comparison to the U.S., should lead to a weaker dollar."

(Read more: These currencies will fare worst vs the dollar in 2014)

Paulsen also argues that the Fed's quantitative easing program has not bloated the U.S. money supply and therefore there is no reason to believe that tapering will slow the money supply.

"And, if the relative growth of the U.S. money supply does not change much vis-à-vis its trading partners, why should ending QE have much impact on exchange rates?," he wrote.

FX: Dollar strength will be 2014 key theme
Ian Stannard, head of European foreign exchange strategy at Morgan Stanley, expects the dollar to strengthen further in 2014, particularly against most G10 currencies.

In fact, the biggest "monetary surprise" this year could be an acceleration of money supply despite tapering, relative to other foreign currencies, causing the dollar to weaken, Paulsen said,

The greenback could also lose its safe-haven premium that it gained during the financial crisis as confidence in a sustainable global recovery grows, according to the note.

(Read more: This could be the hottest currency trade of 2014)

But Paulsen's view is a minority amongst analysts who see the U.S. dollar gaining strength next year as the Fed tapers and the U.S. economy picks up.

The dollar will be the "strongest of the G10 currencies" in 2014, Ian Stannard, head of European foreign exchange strategy at Morgan Stanley, told CNBC in a TV interview.

"One of the major themes which I think is going to be driving that actually goes way beyond the Fed… it's going to be the broader growth picture, the global growth differentials, as well as the changing growth dynamics within the U.S."

Michael Sneyd, foreign exchange analyst at BNP Paribas, said the dollar will do well against low yielding currencies like the euro and yen due to the different stances of the regions' central banks.

As the euro zone faces inflationary pressures, the European Central Bank is likey to "ease policy further", Sneyd said in a telephone interview, and the Bank of Japan will follow a similar path, pushing both the euro and yen weaker.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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