Dollar weakness bet puts Danske on top

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Danske Bank has topped this week's 12-month currency forecast rankings after predicting the US dollar would weaken against the Swiss franc and the euro as a result of changes in policy instigated by the European Central Bank (ECB) a year ago.

On July 27, 2012, with USD/CHF and EUR/USD trading at 0.9784 and 1.2264 respectively, the Danish bank anticipated that the ECB would take aggressive action to stem the downward spiral of the euro and help southern European countries, including Spain and Italy.

When ECB president Mario Draghi uttered his momentous pledge to do "whatever it takes" to save the euro in late July 2012, outlining the outright monetary transactions programme, EUR/USD began to rise and USD/CHF began to fall, reaching 1.3266 and 0.9289 on Monday, close to Danske's forecasts.

"Last summer, there was a lot of focus on the European debt crisis and many believed that the euro would collapse. We took a contrarian view and believed it was only a matter of time before the ECB would come to the rescue by initiating a more aggressive monetary policy. Future euro strength was also based on the view that the US Federal Reserve would continue with an aggressive monetary policy of its own," says Arne Rasmussen, chief analyst and head of rates, FX and commodities strategy at Danske Bank in Copenhagen.

When USD has risen in the past couple of years it has been because of safe-haven flows into the dollar

But despite forecasting weakness in the yen, Danske didn't anticipate the extent of the currency's fall that resulted from the change of leadership in Japan and the three-pronged strategy of prime minister Shinzo Abe to stimulate growth. Danske forecasted USD/JPY to have risen to just 87 by now, but in fact it was trading at 99.82 earlier today.

"With the yen, we believed there would be a more aggressive response from the Bank of Japan, but we didn't foresee it would double its monetary base as it did. In the summer we argued the yen was far too expensive as Japan struggled with recession and deflation; in that scenario it was the only solution for them, but they still managed to surprise the market," says Rasmussen.

Looking forward, Danske expects that, for the first time in two years, there will now be a cyclical strengthening of the dollar. "When USD has risen in the past couple of years it has been because of safe-haven flows into the dollar. Now this won't be the case because of cyclical outperformance of the US economy compared to the eurozone and the Fed's tapering of quantitative easing," he says.