Diverging monetary policies and falling oil prices will be key drivers of currency movements and expect to push the US dollar higher against major currencies this year.
The New Year ushered in a stronger dollar that had rallied to multi-year highs against major currencies last year, as the surge in optimism over a strengthening US economy fuelled the dollar rally that began in July. The economy generated over 2.6 million new jobs, which is the biggest increase since 1999, and the domestic production is estimated to have expanded by three percent last year. In contrast, the Eurozone and Japan grew less than one percent, and they struggled to fend off deflationary pressures in the economy from weak consumer demand.
This year, the Federal Reserve is forecasting the growth rate to remain robust, and accordingly it is prepared to raise the short term interest rate in the coming months. Meanwhile, the European Central Bank and the Bank of Japan are expected to keep their interest rate near zero and renew their efforts in printing money by buying bonds in order to inject more money into their banking system to break a long standing credit logjam that is holding back consumer spending and business investment.
Only two weeks into the year, many leading forecasting firms have revised their annual forecast, which were only published in December, to adjust to rapidly shifting monetary conditions and commodity prices. Since New Year’s Day, Oil prices fell by 14 percent and the Eurozone consumer inflation rate plunged into a negative territory, stoking a deflationary alarm. Japan announced another aggressive round of bond buying to fend off disinflationary pressures and falling real wages. Additionally, China revised its growth forecast down to 7 percent, siting global economic slowdown that will make their exports difficult to maintain.
Against what seems to be a dismal global economic condition that has quickly emerged during the past few weeks, the US economy stands out as one shining beacon and its currency, the greenback, is expected to gain as more funds flow in from overseas in search of higher interest rates and safe haven in the coming months.