Dollar to Rally as U.S. Recovery Outperforms, Bank of Tokyo Says

The dollar will rise to a level against the euro last reached in September as U.S. economic growth picks up and expectations for central bank rate increases elsewhere wane, according to Bank of Tokyo-Mitsubishi UFJ Ltd.

The greenback will rally to $1.27 per euro and 92 yen in a year, the firm said in a research note today. Bank of Tokyo previously forecast the dollar will trade at $1.20 in 12 months before a surge in oil prices in February led the greenback to fall 0.8 percent versus its European counterpart.

“The market has continued to not give enough credit to the potential for the U.S. economy to perform better than expected,” said Derek Halpenny, European head of currency research at Bank of Tokyo in London. “We’re on the cusp of a period of quite strong economic growth in the U.S., and that’s another catalyst for the dollar to recover.”

The dollar was little changed at $1.3801 versus the euro at 2:06 p.m. in New York, compared with $1.3806 yesterday. The U.S. currency gained 0.1 percent to 81.88 yen, from 81.78. The greenback has lost 3 percent versus the euro this year and appreciated 0.9 percent against the yen.

Manufacturing in the U.S. grew in February at the fastest pace in almost seven years, a report showed today. The Tempe, Arizona-based Institute for Supply Management’s factory index increased to 61.4, the highest level since May 2004, from 60.8 in the previous month.

ECB Rate Outlook

The U.S. currency will also appreciate as expectations for European Central Bank increases in borrowing costs diminish, according to Halpenny. The ECB’s main refinancing rate will rise by a quarter-percentage point to 1.25 percent by the end of the year, according to the median forecast of 35 economists in a Bloomberg News survey.

“The reasoning for the decline in the euro is that the markets are pricing in too much in terms of rate hikes in the next 12 months,” Halpenny said in the phone interview. “The markets are getting ahead of themselves.”

The firm estimates the euro will advance to $1.40 in three months as oil prices rise, damping demand for dollar-denominated assets. The yen will depreciate to 85 versus the dollar during the period, Bank of Tokyo said.

Crude oil has risen 15 percent to $98.70 a barrel since Feb. 21 as protests in the Middle East and North Africa threatened supply.

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