Saxo Bank wins with long-term dollar call

John Hardy is unsure how long EUR/USD parity will last

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Saxo Bank has topped this week's currency forecast rankings after correctly predicting the US dollar would broadly strengthen against other major currencies over the course of 12 months, thanks to the likely divergent monetary policy of the main central banks.

On March 21, 2014, EUR/USD and GBP/USD were trading at 1.37 and 1.66, respectively, with the former entering some of the lowest periods of volatility seen by currency markets. But, as summer approached, the US dollar began its bull run, strengthening to 1.08 against the euro and 1.49 against sterling.

"Last year it was a lose, lose scenario for the euro," says John Hardy, head of foreign exchange strategy at Saxo Bank.

"It was either going to do badly because the European Central Bank (ECB) might do nothing and we would then have a new crisis, or it was going to have to act and there was going to be weakening from an accommodative monetary policy standpoint. I just thought it would happen sooner than it actually did," he adds.

Parity is quite likely to be hit, but I wonder if we can stay there for long as it depends on the status of the US recovery

Many forecasters have been predicting parity in EUR/USD by the year end. However, the FX Week contributor consensus has plumped for the pair to be priced at 1.05 in the next 12 months.

Hardy reckons parity will be hit at some point, but questions the longevity of the dollar's strength against the single currency.

"Parity is quite likely to be hit, but I wonder if we can stay there for long as it depends on the status of the US recovery. Maybe we're going to establish a range and get boring again, rather than just continue to pound the euro lower and lower again as the market has priced so much in already," he says.

"Yes, US recovery could be very strong and the ECB could do more easing, and US rates will go up, but I think the correction in the strong dollar has already begun," Hardy adds.

The Danish bank was particularly accurate with regard to sterling, anticipating the recovering US economy would have a knock-on effect on the British currency.

Hardy does not expect the upcoming, unpredictable general election in May to weigh too heavily on sterling. "I don't really see the massive downside risks from sterling at this election. It feels like we've priced in the caution, but [over the] longer term, with the structural economic conditions of the UK, there could be more weakness," he says.

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