Forex: The USD index is set for another positive year over 2012 but it will not be a star performer

(Last Updated On: January 10, 2012)

Forex: The USD index is set for another positive year over 2012 but it will not be a star performer. The USD has been a clear beneficiary of the crisis in the eurozone and will continue to find sustenance unless there are signs of a concrete resolution on the horizon. My forecasts still see the USD index rising to 82.5 by the end of 2012. This would be well below the highs reached during the height of the financial crisis in March 2009 around 89.

While economic recovery is expected to continue over 2012 it will be a tepid one, with prominent downside risks. Therefore, one of the factors likely to hold the USD back is the likelihood that the Fed embarks on a fresh round of quantitative easing which I believe will take place sometime in H1 2012, specifically aimed at mortgage backed securities.

I am not bullish on the EUR but it is clear in my view that there is an underlying degree of support for the currency. In 2012 I expect more downward pressure on the currency. News on the economic front will become more negative and the region is set to slip into recession, albeit a mild one (with downside risks). In contrast, the outlook for the US looks somewhat better even if the recovery will look tame compared to past growth.

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Dollar Euro and Yen Outlook 2012

The USD index is set for another positive year over 2012 but it will not be a star performer. The USD has been a clear beneficiary of the crisis in the eurozone and will continue to find sustenanc…


USD index in 2012 above 95, possibly 100. Euro to drop below 1.20.


From a world economic stand point, I see the dollar gaining strength as China demand for energy is addressed. The US will be the strongest support to China. From this stand point, the EUR pair will decline as AUD and CAD pairs take a stronger position. In addition, US arms deals will as have a big impact.


BNP sees 2012 as the year of the yen based on investors’ seeking safe havens and Asian trade growth. She sees it rising to 70 v. USD. She’s bearish on the buck because she sees the Fed embarking on QE3. Here’s the link to my interview with BNP’s Mary Nicola:


Mary Nicola from BNP argued for a strengthening of the yen vs. dollar with a target of 70 this year (currently 76.94), based on economic growth in Asia and the BOJ’s reluctance to further intervene to prevent the raising yen, as well as risk aversion in Europe and a 3rd quantitative easing (QE) plan in the US.

Well, I doubt that risk-averse investors in Europe will shift their funds to another highly indebted, low-growth country such as Japan. The recent Olympus scandal also illustrated hidden investment risks in an otherwise mature – and some would add declining – economy. Also, the current boost to the Japanese economy induced by the reconstruction efforts after the tsunami and Fukushima nuclear accident of March 2011 is temporary in nature. When it levels off later this year and the economy returns to normal, I think many investors will wake up with a headache from the newly-added government debt that supported these efforts.

The only element in favor of an even stronger yen at this time is the recently announced pact between China and Japan for direct currency trading between the two nations (thus bypassing the US dollar as a reference in international trade), but I see this as more beneficial to China which has become the real economic power in the region now.

As for a 3rd QE plan here, I am not convinced. The US dollar has fallen dramatically over recent years, which has helped export companies for sure. But given the unprecedented cash hoards that businesses are sitting on already, and the ridiculously low treasury rates, I can’t see any benefit from additional QE. And the US government certainly has other means to boost employment.

In conclusion, I expect the yen/dollar rate to stabilize at current level for Q1, and the dollar to raise slightly as the Euro crisis develops, with a target of 82 yen per dollar in Q3.


alan Ruskin of Deutsche Bank chimed in on the yen today. He’s also bullish on the yen against the euro. He write,, “the most important back-story to the yen’s strong performance continues to be the unwillingness of long-term Japanese investors to recycle the Current Account surplus in unhedged form.” Nicola had noted that Japanese investors aren’t going to stay home given the low yields abroad. On another point you raise — Nicola didn’t say Japan would not intervene. She was saying that when Japan intervenes, it ends up sterilizing the intervention, so it doesn’t affect the currency level much.



I cannot find the source article of the citation above, but I understand that Alan Ruskin be “bullish on the yen against the euro”, I am too! With the euro facing its greatest crisis since inception 10 years ago, it is reasonable to expect that the euro will further decline in 2012 again all other major currencies.

That being said, it doesn’t mean that the yen will further appreciate against the dollar, and I actually made the opposite argument for Japan based on their economic growth (or lack thereof) and underestimated sovereign risk.

Alan Ruskin makes the point that Japanese investors continue to recycle current account surplus in hedged form. One should question why they choose to lock in the current forecast rate. Do they anticipate further appreciation of the yen, or merely follow internal rules & regulations? What is the ratio of new contracts? But I remain skeptical of such purely financial analysis of the market, if anything because investor sentiment is always changing.


The US Administrations displeasure with Japan’s intervention, the agreement between China and Japan for direct trade between their currencies, has made me look at a worst case scenario for dollar/yen. Since there is precedence for a huge dollar devaluation-Plaza Accords-1985, or it is possible that we are in the midst of one…I have no idea but is it possible for a devaluation against the Asian rim currencies…..

9/2011 return +6.70%.
10/2011 return +5.612%.
11/2011 return +4.76375
12/2011 return +.0015%.

MTD Total: +17.0775%.


Since everyone now “knows” that USD is going up…i’d say a strong Risk On trade in Q1 2012 followed by a big USD rally…probably followed by QE3



NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

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