After jumping to above 1.2050, the highest level for over 4-years, the Euro to Dollar (EUR/USD) exchange rate retreated to below 1.1750 amid a dollar rebound before trading around 1.18.
ING is doubtful that the US currency will suffer serious losses this year on structural grounds, but does maintain a bearish stance on the currency and it forecasts EUR/USD gains to 1.22 by the end of this year.
As far as the economy is concerned, ING expects a slowdown in US growth for the second half of the year which will encourage two further Federal Reserve interest rate cuts. It expects that lower yields will lead to increased hedging on US assets.
The bank also sees dollar risks emanating from elevated equity valuations and uncertainty surrounding the mid-term elections while stronger Euro-Zone data will help trigger EUR/USD gains.
ING notes that the proportion of central bank reserves held in dollars is liable to decline slightly further this year. Nevertheless, the bank does not expect the selling of US assets or wider structural pressure on the currency, limiting overall losses.
