Goldman Sachs - "US Dollar FX Forecasts: We maintain our EUR/$ forecasts at 1.38, 1.40 and 1.40 in 3, 6 and 12 months and revise our $/¥ forecasts to 103, 107, 110 from 98, 103 and 107 in 3, 6 and 12 months respectively. Current GSDEER for EUR/$: 1.19; $/¥: 103.9.
Motivation for Our FX View: The continued deficits in the US balance of payments and government budget, combined with accommodative monetary policy, will likely keep the trade-weighted Dollar at undervalued levels relative to GSDEER. We foresee a small reappreciation from current levels. Some Dollar strength against the Yen and some EM currencies may be partly offset by weakness relative to European currencies. The latter would benefit from a declining Euro area risk premium and a stronger balance of payments. The acceleration in US and global activity in 2014 is likely USD-neutral, falling risk aversion and US capital outflow could offset the impact from higher yields.
Monetary Policy and FX Framework: The Fed has a dual growth and inflation target. As a result, monetary policy has generally been more volatile and reactive than in pure inflation-targeting countries. The exchange rate floats freely. The US Treasury is in charge of FX policy, although the Fed occasionally also comments on currency issues.
Growth/Inflation Outlook: 3Q2013 real GDP growth surprised to the upside at 4.1%qoq annualized, largely due to an increase in inventories. Our Current Activity Indicator accelerated to 3.7% in November, while we expect moderate growth in 2013 as a whole at 1.9%, partly linked to fiscal drag. Growth in 2014 will likely accelerate to 3.3%, but inflation is expected to remain well below the Fed target for the foreseeable future. We see considerable spare capacity in the economy, underpinning our view of a deceleration in core inflation to 1.7% in 2014.
Monetary Policy Forecast: The Fed announced tapering of open-ended asset purchases at the December 2013 FOMC meeting. We expect asset purchases to end in 4Q2014, provided upcoming data will not contain major surprises in either direction. At the same time, the Fed has also strengthened forward guidance We expect the first rate hike in 1Q2016.
Fiscal Policy Outlook: Fiscal policy is currently a significant drag on growth but this is expected to diminish towards the end of the year. The deficit has fallen sharply in recent months and is expected to decline over the next few years.
The longer-run fiscal outlook remains problematic and entitlement reforms are needed to ensure sustainability.
Balance of Payments Situation: The US BBoP deficit narrowed on a trend basis by 0.6% of GDP to -3.5% in 3Q2013. The current account deficit improved slightly on a trend basis to 2.4% of GDP in 3Q2013. The November trade deficit further surprised positively coming in at US$34.3bn, mostly on the back of improvements in the trade of petroleum-
related products.
Things to Watch: We continue to monitor capital flow trends in the monthly TIC data for signs of any persistent improvement in the BBoP. A tapering related rise in US interest rates could lead to USD appreciation."

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