Having shed more than 10 percent of its value against a basket of currencies in the past year, the fortunes of the U.S. dollar may start turning around soon, according to one analyst.
"I have a very strong belief that by the end of this year, the dollar will be much stronger than it is right now," Kathy Lien, Director of Currency Research at Global Forex Trading told CNBC on Thursday. Click here for full interview.
"I don't think come July 1st, we are going to see a vertical move higher immediately for the U.S. dollar," she said, referring to the Federal Reserve's second round of quantitative easing, which ends on Thursday.
Lien expects the dollar index to rise gradually between 7 and 10 percent by the end of the year, bolstered primarily by two factors.
Firstly, she believes the U.S. debt ceilingwill be raised by August 2, a development that would be dollar positive. The Obama administration and U.S. lawmakers have been under pressure to raise the limit, currently capped at $14.3 billion, or risk the nation going into default.
Lien also expects the U.S. economy to continue strengthening for the rest of the year, which would prompt the Fed to begin a tightening cycle, further boosting the greenback.
“The Federal Reserve will start talking about raising interest rates, a further exit strategy…. all those should open the door for dollar recovery,” she said, and adds that the central bank could start hiking rates as soon as the first quarter next year, starting with 25 basis points.
Investors should do well betting on the U.S. dollar against the Swiss franc, Lien says, as the pair is “very oversold.” She expects the dollar-swiss franccross to reach 0.88-0.90 by the end of the year, an increase of at least 4 percent from the current levels.
She thinks the dollar will have upside against the Japanese yen as well, but recommends investors avoid the dollar-euro trade.
"There's going to be a lot of volatility in euro-dollar in next couple of months because of sovereign debt crisis in Europe and stress tests," she noted.
Overnight, the euro weakened to $1.4361 immediately after the Greek austerity votewas passed, before rebounding to $1.4483.
"We did not see the extreme strength that some had anticipated for the euro-dollar, because investors are realistic and they realize this is good news for Greece - it's a step in the right direction,” said Lien. “But there are still some challenges that lie ahead that they need to overcome before the sovereign debt crisis in Greece can be behind us."