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Dollar’s Strong Showing At Prospect of Interest Rate Rise

The dollar has had a strong showing as higher US interest rates remain on the minds of investors, and many are predicting that the dollar rally is not over.

The dollar index reached a new 12-year high on Tuesday, now up 3.3 percent for March. The yen fell relative to the greenback and the euro moved sideways, moving towards to parity at $1.07 relative the dollar.

Gold is near its lows of the year, making a valuable buy.

Central bank policy has created a rise in the dollar index, most of all against the euro, as many mainstream investors predict the Fed will push interest rates higher in the coming months.

“Year to date, the euro’s down 11 percent. This is only March. Do we have another 7 percent before the end of this year? I don’t see why not,” said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman. “We’re only about half way to where we’re going (against the euro). …There’s another 30 cents or so on the downside.”

Chandler said the euro could be setting up to retest its all-time low just above 0.82 to the dollar by 2016.

“As the euro/dollar goes down it’s going to be deflationary for everybody else. It’s going to be bad news for emerging markets,” said David Woo of Bank of America Merrill Lynch. He said China could possibly be forced to devalue its currency as the euro sags against the dollar. Europe is China’s biggest export market.

“That’s why it’s the currency wars. Someone wins. In this case, it’s clearly Europe,” said Woo, noting the U.S. stock market is flattish this year, while European equities are performing better.”I remain constructive on the dollar medium term,” said Richards, adding the Fed is likely to begin the rate hiking process in June, then hike again in October and December.

“I think the euro is going to parity in 2015 and back to 90 [cents] in 2016,” said UBS director Paul Richards. “I remain constructive because of the Fed’s actions on QE. When the world was doing nothing, they got ahead of the game and we’ve seen the economic benefits to the U.S. and I think ultimately that will benefit the U.S. dollar.”

“Hedging currency risk becomes more important in a strong dollar environment,” he said.

“Emerging markets have generally required four things: one, a weak dollar; second, strong commodities prices; third, strong world growth; and the fourth thing is about Fed policy,” he said.

“Now the dollar is expensive. They want to get out of it, and they don’t want to take the pain anymore,” he said.

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