After surging to above 1.2050 in January, the Euro to Dollar (EUR/USD) exchange rate dipped to below 1.18 but has rallied again to above 1.19 amid a fresh round of dollar selling.
ING expects net dollar losses this year and has a 12-month EUR/USD forecast of 1.22.
The bank considers that the dollar will be more vulnerable this year. Firstly, on domestic grounds, it expects that the Federal Reserve will cut interest rates at least twice this year which will erode yield support, especially if there is further deterioration in the Labour market.
The bank also expects that there will be further underlying concerns surrounding US policymaking and uncertainty surrounding the Fed stance if Warsh is confirmed as the next Chair. These concerns are liable to undermine dollar support.
Importantly, the bank also considers that the global growth outlook will continue to improve this year.
One key argument for a firm dollar during the past two years has been a lack of attractive alternatives. If, however, there is greater confidence in the global economy, ING considers it is more likely that there will be net asset flows away from the US.
