Dollar suffers as risk appetite grows according to Bank of Ireland

The US dollar has fallen by 10% against a basket of the major currencies since mid-March. The largest declines were against the commodity currencies, including a 25% fall against both the New Zealand and Australian dollars, but the US currency also depreciated substantially against sterling (by 16%) and the euro (over 10%). The move against the latter saw the single currency rally from a low around $1.25 to $1.40, a rise which has prompted us to reconsider our euro/dollar forecast for the year as a whole according to Bank of Ireland’s June Bulletin which was published today, Wednesday 3 June 2009.

Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “We have been bullish on the dollar over the past year on the view that the aggressive policy actions taken by the US authorities would limit the fall in output relative to Europe, and prompt a quicker recovery than is likely in the euro area. That premise has proven correct, at least to date: US GDP has fallen by 3.3% from its peak, against a 4.6% decline in euro zone output (and a 4.2% fall in the UK) and consensus forecasts now point to growth of 1.9% in the US economy in 2010, against 0.4% for the euro area.

“This relatively better performance and outlook is not providing support for the US currency however, and other factors are clearly at work, helping to push the dollar lower. Risk appetite now appears to be playing an important role: the dollar (and yen) benefited most from a flight to quality last autumn as investors fled from risk, but the corollary is that the dollar has suffered in the wake of the markets recent rise in appetite for risk, evident in the global equity rally and in tightening credit spreads. Of late, then, the markets optimism that a global recovery is at hand has proven dollar negative, despite the fact that the US still looks likely to lead any upturn.

“The euro/dollar may have run out of steam in the short-term and a minor correction may be in store. We are now changing our end-year forecast, however, to $1.35 and expect the euro to trade in a $1.30 to $1.40 range rather than $1.20 to $1.30. Our sterling view has proven more in line with developments and we remain of the view that sterling will be a beneficiary of a global upturn and better news on the international banking sector. Consequently we reiterate our view that the euro will trade around 85 pence in the coming months”, concluded Dr. Dan McLaughlin.


3 June 2009