Tags: Wells | Capital | Paulsen | Dollar

Wells Capital's Paulsen: Strong Dollar Won't Last

Sunday, 05 Jan 2014 10:00 AM

By Michelle Smith

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Contrary to wide expectations for that the dollar will continue to strengthen this year, analysts at Wells Capital Management project expect the U.S. currency to weaken.

The weakness is expected in part because the global economy is likely to improve this year, CNBC says Jim Paulsen, chief investment strategist and economist at Wells Capital Management explained in recent commentary.

“U.S. real GDP growth will likely rise above 3 percent this year, and in isolation this would strengthen the U.S. dollar,” Paulsen wrote.

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“However, most other economies are also experiencing acceleration in their recoveries. And, in most cases, improvements in foreign growth rates are more dramatic and by comparison to the U.S., should lead to a weaker dollar,” he added.

During the financial crisis, the greenback benefited from its safe-haven status. But as the global recovery takes hold this year, that premium is likely to fade, placing greater downward pressure on the the dollar, Paulsen notes.

He also points to widespread beliefs that the Federal Reserve's quantitative easing programs would significantly increase the money supply. According to Paulsen, it didn't happen. Therefore, the money supply is not likely to be reduced by the Fed's decision to taper as was previously expected, he explained.

In fact, CNBC says Paulsen projects that the biggest “monetary surprise” this year could be an acceleration of the money supply despite tapering, relative to other foreign currencies, thereby causing weakness in the dollar.

Paulsen's projections contrast with forecasts from other analysts who appear optimistic about the outlook for the greenback this year. “There is currently a dollar strengthening taking place, which we believe will continue and is likely to be a feature of 2014,” Ian Stannard, head of European foreign exchange strategy at Morgan Stanley told Bloomberg.

“Changing growth dynamics in the U.S. and diverging monetary policy between the U.S. and much of the rest of the G-10 [nations] are likely to keep the dollar supported,” he added.

In last month's Foreign Exchange Outlook, Scotiabank analysts made a similar call, citing expectations that the U.S. will be a leader in the global economic recovery, providing support for the dollar.

The Fed is moving toward tapering and slowing its bond buying programs, Scotiabank analysts noted. But the European Central Bank and Bank of Japan are in the midst of taking more dovish turns, which is expected to drag down their currencies.

Scotiabank says bullish sentiment toward to the dollar and the relative position of the U.S. in terms of central bank policy and growth are likely to be among the supportive themes for the dollar in 2014.

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