At present most of the currency market analysts are unanimous that the dollar outlook is good and will stay that way. However, the dollar has also lost its relevance for the global economy due to a lot of uncertainties about the status of the US economy and its growth rate.
There is no real consensus on what the long-term economic impact of the euro crisis and various other events might be.
Nevertheless, it is generally agreed that the dollar outlook has been negatively affected by various negative economic events. Generally, market participants agree that the dollar outlook is still good and will continue to be that way until the end of the year. However, a number of market participants maintain that they think that the outlook could be more negative after the end of the year.
According to some market participants, there are several reasons why the dollar outlook could be less positive in the coming months. For instance, if inflation continues to rise and growth in the US economy does not pick up as expected, the dollar outlook could turn negative. The Fed has already expressed its reservations about inflation and the Federal Reserve will continue to watch inflation closely.
Further, the dollar outlook could turn negative due to further currency devaluations in emerging markets, particularly in the Eurozone. The IMF is worried about this development and this fact is said to be a major reason for the lower dollar outlook in emerging markets. However, even though the EUR/USD is currently at historic lows, it could fall even further as capital flows from emerging economies outpace domestic investment in these countries.
Also, the latest events involving the European Commission could further hurt the dollar outlook. Several negative events have been taking place and the Commission has been embarrassed by having the VdS crisis. The political fallout will continue to be the main reason for the dollar to decline for the next few months.
Despite the pressures, the dollar outlook in emerging markets will remain stable because the combination of the Fed’s easing policy, the European Commission’s fiscal consolidation and the US Federal Reserve’s asset purchases all have the effect of lifting asset prices and strengthening currencies. However, many observers do not believe that any of these events will happen. Indeed, these observers do not expect any significant movements in the US dollar by year end.
Nevertheless, one of the ways of looking at the dollar outlook is to look at it in terms of USD/JPY. This means that you think that USD/JPY would be more positive than USD/EUR. The US dollar is currently trading around 1.36 and will most likely stabilize around this level for the next two months.
One way of assessing the dollar outlook is to look at it in terms of a trade-weighted index. The USD index is currently trading around 97 and will most likely remain relatively stable over the next two months. However, some market participants predict that the index could fall as low as 96.
If you look at the dollar outlook in terms of a narrow-based index, such as the euro index, the situation is quite different. The euro index is currently trading at around 1.35 and will probably remain relatively stable for the next two months. But some market participants expect the euro index to fall below one for the next six months or so.
So, a stronger dollar makes the euro index better in terms of dollar outlook. Conversely, the stronger dollar makes the dollar index worse in terms of dollar outlook.
Further, some market participants also argue that the dollar outlook has been negatively affected by a lot of uncertain events and economic developments. Specifically, they refer to the outbreak of the euro crisis and the political consequences that followed. As I have argued previously, the dollar outlook could turn negative as the euro crisis spreads and a number of emerging markets start to feel the heat of capital outflows and reduced demand for currency.