In an early October report, the analysts noted that the dollar rally had stalled against the G10 currencies. Despite weakening a bit this month, the dollar has been trending higher since mid-October. The Bank of England’s effective exchange rate data shows that at 86.54 as of Dec. 13, the dollar is approximately 6 percent stronger than it was at the beginning of the year. Credit Suisse expects the trade-weighted dollar index to rise to 90.70 over the next three months and to 95.99 over the coming year.
The analysts say a likely divergence in monetary policymaking among the world’s largest central banks in the New Year should give the rally traction. Consider the following three examples:
–While pundits expect the Fed to start reducing quantitative easing measures either this month or next, the Bank of Japan is widely expected to step up its own asset-buying program early next year.
–With inflation at worryingly low levels, the European Central Bank is not only unlikely to raise rates, but could actually ease further.
–The mining investment boom that had thus far helped Australia to avoid most of the negative effects of the Great Recession has just about run its course. Credit Suisse’s analysts expect mining investment to peak at about 8 percent of GDP this year. The Australian economy is due for a major rebalancing, and if the value of the Aussie doesn’t fall on its own, the Reserve Bank of Australia will come under more pressure to push it down by cutting interest rates again. The central bank already made 25-basis-point cuts in both May and August of this year, leaving the current cash rate at 2.5 percent.