We're in 'a world in which the dollar does best'
With developed countries' central banks in a race to the bottom and risk off the table for now, the dollar emerges again as the currency of choice
Political uncertainty has risen on both sides of the Atlantic and there are fears of a slowdown in China as the government imposed stricter-than-expected measures to slow down a property boom in big cities.
In this context, the US dollar the worlds reserve currency - has again emerged as the currency of choice for some strategists.
Cyclical currencies? No, thanks. USD? Yes, please! wrote Danske Bank senior analyst Christin Tuxen in a weekly foreign exchange research note.
David Simmonds, head of currency strategy at RBS, confessed that he is a dollar buyer; just a dollar buyer in another note.
Simmonds argument is that, although the debt sequester which is said to bring about spending cuts that are predicted to slow down the US economy has kicked in, the US is likely to muddle along while Europe, including the UK, will do worse.
I will buy dollars because the world is still a fundamentally risky place. Thats a world in which the dollar does best, Simmonds said.
In the eurozone, inflation is falling while data shows that bank credit growth remains weak. The Italian elections result was terrible and with lasting consequences and rates strategy colleagues think Italy 10-year yields are going back to 7%. If Italy 10-year goes back to 7% ... then EUR/USD goes to 1.18, he added.
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Sterling debasement will loom large on markets minds before and after the current head of the Canadian central bank, Mark Carney, takes his post as Bank of England governor.
In Japan, Haruhiko Kuroda, nominated as the next Bank of Japan head, is going to be sufficiently bold as the new Bank of Japan governor to give USD/JPY the next leg up through 100, according to Simmonds.
Within developed markets, the Bank of Japan is likely to be the most aggressive in expanding its balance sheet, he said.
Simmonds is selling the New Zealand (NZD) and Canadian (CAD) dollars.
Its all about basic balances and real exchange rate valuations in a riskier world.The Australian dollar (AUD) is also acutely vulnerable as mining investment peaks; its fall may be a lot faster if the outlook for China deteriorates, he warned.
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