US dollar to remain strong vs. major currencies in 2013

Source:Xinhua Published: 2013-1-1 2:08:52

The US dollar ended mixed against major currencies on the last trading day of 2012 after President Barack Obama said an agreement to avert the "fiscal cliff" was "within sight" but "not done" yet.

In late New York trading on Monday, the euro was traded around $1.3190 and the dollar bought about 86.7 Japanese yen.

For the whole year of 2012, the euro has gained 1.8 percent against the dollar this year, despite lingering worries over eurozone debt crisis and mainly boosted by a series of good news from Europe recently.

The yen fell more than 11 percent in 2012, posting the worst yearly performance since 2005 after the last round plunge towards the end of the year as Shinzo Abe was elected as prime minister and he is speculated to push the central bank to take further easing moves.

Hours after Obama's speech, US media reported Monday night that the White House and Senate Republicans have reached a deal to avert the "fiscal cliff", news reports said the plan would include revenue increased and a two-month delay for the automatic spending cuts.

The news would change scenario many investment banks have established, but as the Bank of America Merrill Lynch said in its 2013 outlook report, even if the fiscal cliff is averted, there would be very significant fiscal tightening in 2013.

Looking ahead, while fiscal condition turns tight across the globe in 2013, central banks will move more aggressively to assist economic growth, making the currency market prediction trend more difficult.

However, despite complicated forecasting environment, the dollar is predicted to remain strong compared to major currencies.

Firstly, although moves of central banks would affect currency rates, the ultimate determinant is the country's economic situation.

Recent US housing and job markets data showed that the economy is on track of recovery and most investment banks predict US economic growth would top 2 percent in 2013 while eurozone countries, Britain and Japan may stagnate or experience weak growth at best.

Eurozone's financing environment has improved since the European Central Bank launched the monetary transaction (OMT) program, but it's still not enough to resume growth in the area. German Chancellor Angela Merkel Monday said the eurozone's debt crisis was "far from over" and the economic environment of next year will be more difficult.

Secondly, in the face of tighter fiscal policy, European Central Bank and central banks of Britain and Japan are all expected to launch more aggressive easing measures compared to the Fed, which would weaken the euro and the yen. Moreover, US the Swiss bank, believes that the Fed's latest round of quantitative easing is already largely priced in by financial markets.

Last but not least, dollar's status as a safe-haven asset and a major currency used in international trade has not changed. A negative shock in global economy or even in the US tends to favor the dollar as demand for safe-haven asset will rise. Fiscal tightening and greater US energy independence, which lower the US's trade deficit, would strengthen the dollar and raise its stature as a safe-haven currency, said the BofA report.

Overall, forecasts of several investment banks generally expect the euro/dollar rate would reach 1.2000 and the dollar/yen rate would rise to 90 yen towards the end of 2013.

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