Morgan Stanley currency analyst Sophia Drossos says the dollar is very undervalued and will rise significantly.
“We forecast the USD to rally 10 percent against other developed market currencies in 2010, with most of these gains concentrated against other G4 currencies,” Drossos writes in a note to investors.
“For the dollar to remain weak, U.S. data would need to continue to disappoint versus other major economies,” she notes.
“However, we do not expect this will be the case. Instead, the outlook for the U.S. economy is brightening while other major economies appear lackluster.”
The prospect of a U.S. economic recovery that will be relatively stronger than other major developed nations means that the dollar is most likely to rally against the euro and yen, Drossos says.
“In that vein, two of our favored strategic trades for 2010 are short EUR/USD and long USD/JPY.”
Drossos’ currency model shows that downside risks for the U.S. dollar have fallen substantially as of late.
“The cyclical tailwinds from a US recovery should offset ongoing structural concerns, especially as these are well known and much bad news is already in the price,” she says.
“Indeed … the trade- weighted US dollar is currently two standard deviations below our projected fair value.”
Spot gold has continued to slip with the strengthening of the U.S. dollar, Benzinga.com reports.
The dolla recently reached a one-week high against the euro, which subdued the demand for the precious yellow metal.
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