As the market speculates on whether the Federal Reserve will ease monetary policy at its meeting on Aug. 10, one analyst is predicting more losses for the dollar.
Fed Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) will change the tone of their language to indicate to the market that the Fed sees the risks on the economy to the downside, Thanos Papasavvas, head of currency management at Investec Asset Management, said.
“Next week we will get a change in language and Bernanke will then wait for two or three months to see if the data will warrant a move on further quantitative easing,” Papasavvas said.
This will be dollar negative, with both weak data and expectations of further Fed easing driving the US currency lower, he predicted.
“Fair value versus the euro is between $1.30 and $1.35, there is a chance the euro could rise to $1.43,” he said.
With euro zone and UK growth rising, governments across the European Union are getting to grips with soaring government debt. By contrast, the fact the US continues to borrow to fund stimulus programs will be a further negative for the dollar, according to Papasavvas.
European Central Bank (ECB) President Jean-Claude Trichet is expected to be upbeat when he talks to the press later Thursday following the August decision on borrowing costs.
After the well-received pan-European bank stress tests and a raft of positive data, the sovereign debt focus will begin to fall on Washington, Papasavvas predicted.
“Dollar weakness will be the story of the next few months,” he said.
Fragile Euro Zone Recovery
But one economist though is questioning how long the good times will last for the euro zone.
“With the worst fears concerning peripheral debt easing a little, it is not surprising that the euro’s rally has continued," Jonathan Loynesm, chief European economist at Capital Economics, said.
"But further falls in consumer confidence in the periphery have highlighted the damage that fiscal austerity can do. As the fiscal squeeze spreads and tightens, sentiment in the region’s core might deteriorate too,” Loynesm warned.
“Activity indicators suggest that the euro-zone is performing surprisingly well, albeit with a marked divergence between the core and periphery,” he said.
But consumer indicators across the region show few signs of improvement in core Europe while falling in the periphery, Loynesm said. He believes business sentiment is stronger but is worried that strong exports will not last for ever.
“External indicators suggest that export growth may soon slow from its current high,” he said.
While there have been signs of improvement in hiring in Europe, unemployment remains a major worry, according to Loynesm.
“Labor market indicators have shown that unemployment is still rising in the euro-zone as a whole,” he said.