USD Strength to Endure in 2015

12/19/2014 9:00 am EST

Focus: FOREX

Alfonso Esparaza

Senior Currency Strategist, OANDA

Looking at most economic projections for 2015, not many see the US dollar as weakening, or at least not for any considerable length of time, so OANDA senior currency strategist Alfonso Esparaza highlights what is supporting the US dollar strength heading into 2015 and why.

For all the talk of renewed currency wars, the policy-driven depreciations that have dominated foreign exchange markets since the summer could until now as easily have been described as a benign global conspiracy to restore the dollar’s primacy.

Fresh injections of stimulus by the European Central Bank and Bank of Japan sent the euro and yen tumbling to multiyear lows against the greenback, helping their fight against deflation. Policy makers in Australia and New Zealand welcomed the dollar’s rise after struggling with overvalued currencies for years. Many emerging markets were content to live with weaker currencies that helped their economies rebalance.

Nor did US politicians object: instead, they appeared to tacitly endorse ECB president Mario Draghi’s assertion that “the exchange rate is the product of monetary policies that are on a diverging path...because of the different economic conditions.”

But now, the combination of a stronger dollar and sliding oil price is causing mayhem, pushing Russia’s ruble into free fall and spreading to relatively robust emerging markets, while investors flee to the safety of the yen and Swiss franc.

Even the dollar has suffered in the past week, giving ground to the traditional haven currencies, but few investors think it will stall for long, with the theme of monetary divergence likely to remain dominant in currency markets in 2015.

By Alfonso Esparza, Senior Currency Strategist, OANDA

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