One reason for bullishness is the improving US data. The housing market is recovering and unemployment gradually falling, stimulating consumption, while the fiscal squeeze from Washington will abate this year.
Throw in signs of an uptick in business investment and 2014 "may finally be the year that the recovery gathers some speed", says Capital Economics.
The US certainly looks in better shape than any of its competitors, and that has prompted the Federal Reserve to begin tapering its quantitative-easing programme.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
While it is still loosening monetary policy, albeit more slowly, it looks set to raise interest rates far earlier than the European Central Bank or the Bank of Japan. They look more likely to step up or begin money printing rather than head towards tightening.
Relative expectations for economic growth and monetary policy are a key driver of exchange rates. The higher the short- or long-term interest rates on offer in a country, the more appealing holding its assets becomes.
The US is closest to raising interest rates, which is positive for the dollar. Long-term interest rates are also likely to rise as the economic backdrop improves.
Another effect of tapering and the prospect of eventual monetary tightening is to prompt money to leave riskier assets, such as emerging markets, and head back to the US. So emerging-market currencies are also likely to weaken against the greenback.
Another tailwind is a structural improvement in America's current-account deficit. This external deficit had reached 6.2% of GDP in 2005, a sign of a country "living dangerously beyond its means", says The Economist.
A large external gap implies a weaker currency, which is needed to correct the deficit: if exports get cheaper and imports more expensive, the trade gap will shrink. But America's current-account gap is down to around 2% of GDP largely because shale oil has reduced oil imports.
Add this all up, and Morgan Stanley reckons that the greenback, now at $1.36 to the euro, will hit $1.24 by the end of the year.
-
IHT receipts hit record high – is it set to rise further?HMRC is set to collect a historic number of IHT receipts between April 2023 and March 2024. We look at how you can stop the taxman eating into your inheritance.
-
Adidas, Nike or Jordans - could collectable trainers make you rich?The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
