The euro hit a two-year high against the US dollar on Friday after officials from the European Central Bank and Germany's Bundesbank suggested that European interest rates may be too low. Besides the hit the dollar took again the euro, the US Dollar Index also had its worst day in two months.
Meanwhile, this is occurring as the US Federal Reserve Bank begins to taper its bond-buying stimulus program, thus potentially causing a hike in US rates as well.
In other words, the coming year could be a wild one in the currency markets.
What can we expect next? Amelia Bourdeau, Director of FX Sales at Unicredit AG, gives her three predictions for the dollar in 2014 to Talking Numbers.
1. It will not be a one way street higher for the US dollar in 2014.
2. The Fed is tapering, but monetary policy is still accommodative.
Bourdeau says: "Currency markets are going to be very exciting in 2014. We of course have the Fed tapering throughout the year. But, monetary policy – as the Fed has stressed – in the United States is still very accommodative. So, you're really going to have to pick and choose which currencies to be short versus the dollar against or which currencies the dollar will do well against."
3. The US dollar will appreciate against the Swiss franc, the Japanese yen, and the Canadian dollar; the US dollar will lose ground against the New Zealand dollar.
Bourdeau says: [Tapering] "will mean a stronger dollar against certain currencies. I think the dollar will be stronger throughout 2014 against the Swiss franc, the [Japanese] yen, and the Canadian dollar. For Swiss franc and [Japanese] yen, the dollar will be strong because there's less of a need for those other two safe-haven currencies – Swiss [franc] and [Japanese] yen – now that policy in the United States is settling down and US growth is looking up. The Canadian dollar is kind of just a one-off in the sense that Canada's economy is doing okay but its inflation outlook is very low. That surprised investors last week. So, the dollar will certainly be strengthening against the Canadian dollar as investors wonder if the Bank of Canada has to cut rates in 2014.
(See more: CNBC's currency coverage)
"I think the dollar will weaken against kiwi [the New Zealand dollar] which, as people know, is one of my favorite currencies because the Reserve Bank of New Zealand will be hiking its policy rate in 2014. They're expected to do so in March. As we near that date, a little bit beforehand, the market will start paying more attention to kiwi and it will start gaining some ground."
Watch the video above to see the full interview with Amelia Bourdeau on what's next for the US dollar in 2014.
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