Expert currency predictions for 2011
Making long-term predictions in the currency markets is a tricky game to play and no-one can predict with utmost certainty the direction a currency will move.
Indeed, a lot of the attraction in trading forex is the speed with which you can get in and out of the market and the fact you can change your view on any one currency's fortunes at any point.
But it can still be helpful to put the sudden rally or fall of a currency into context and decide whether you think it will be a persistent trend, or if it is a temporary retrace of the true direction you think it will likely take. We collected the views of industry experts on how they think the main currencies will fare in 2011.
Christina Weisz, sales director at Currency Solutions, says: "With the UK recovery still stilted, but marginally better than expected, there is a reasonable possibility that we could see an interest rate hike in the first half of the year.
"Interest rate rises nearly always strengthen a currency and this is a very important determining factor which will have large-scale affect on sterling."
When the Bank of England does eventually raise interest rates, she thinks we should expect sterling to strengthen against the euro, particularly if the eurozone data is still subdued at this time. Whether it will similarly rise against the dollar really depends on how monetary policy plays out in the US once the second round of quantitative easing is completed.
She advises currency spectators to keep a very close eye on fundamentals – guided by every cut, increase and announcement made in fiscal policy – to help decide if they are bullish on sterling or not.
Jeremy Batstone-Carr, director of private client research at Charles Stanley, says: "Sterling is going to do what it regularly does. It will be on a hamstring between the euro and dollar."
He thinks that the UK's commitment to fiscal austerity has helped keep the pound relatively strong and adds if eurozone ministers fail to come to an agreement on the best way to deal with the debt crisis, sterling will remain a relatively safe haven in the European time zone.
The euro has enjoyed brief respite this week as comments from a raft of top European figures have served to improve sentiment towards the single currency.
ECB President Jean-Claude Trichet encouraged speculators with what was deemed a more hawkish tone as he announced the central bank was not adverse to rate hikes if necessary. He also made clear that individual countries had to impose fiscal policies to bring their deficits under control.
Supportive comments from German officials this week have also boosted hopes that the European powerhouse is finally getting behind more decisive action in dealing with the debt crisis. But a lot hinges on the meeting of European finance ministers next week and whether they can agree on new powers for the European Financial Stability Fund.
Batstone-Carr says the eurozone's difficulties have not disappeared and he thinks the euro will get weaker against the dollar and pound once again unless real and long-term action is taken. "If the European authorities get round the table and deal with the issues properly then you could all of a sudden see the whole picture change, but so far nothing has changed and the region is going to be dogged by slow growth, high levels of unemployment and huge deficits."
Duncan Higgins, currency analyst at CaxtonFX, agrees there is no real appetite for the euro in the market at the moment: "There's no confidence and no near term resolution. The usual suspects are still in the headlines and our view is that the dollar will maintain its strength for the next four, five, perhaps even six months."
Weisz says fears of a euro meltdown seem vastly exaggerated: "When you consider the length of time it took for countries to opt into the single currency, it is a fair assumption that in the hypothetical event they did want to leave, any plans to opt out would take years to come to fruition."
But although she thinks the euro is not in danger of collapsing, she thinks it will probably struggle against other major currencies and smaller eastern European currencies for some time.
Higgins is bullish on the dollar for at least the first half of 2011. He says against the euro it will have the greatest strength as the euro has started on the weakest footing. "The dollar rally could have quite a lot further to go," he adds.
In the first half of last year he says it was heavily sold at times and so there is plenty of room for it to gain against the euro, which he deems overpriced even in its current weakness.
Batstone-Carr also thinks the dollar will start the year with a bang, but in a non-consensus view adds that it will lose that strength as the year wears on. He says the crunch time will be in the first week of March when the market turns its attention to whether a third round of quantitative easing will happen.
His prediction is the market will take the view there will be no third quarter and that the Federal Reserve will take baby steps towards policy normalisation. But he sees tough times ahead for policy makers in the US who will have to implement some fiscal austerity to get the deficit under control.
This article was written for Interactive Investor
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
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