Royal Bank of Scotland - "Our strongest currency view globally is to buy/own US dollars. Enthusiasm for long dollars partly reflects relative US cyclical optimism. The US has come further in terms of household deleveraging and is further down the track (compared with Europe in particular) towards growth recovery.
Still, with the US debt sequester ongoing and economists busy salami slicing growth expectations again, we are reluctant to overdo the cyclical optimism story. More realistic is a scenario under which the US muddles long and hence outperforms a Euro area still mired between recession and weak growth. Less US cyclical pessimism, perhaps. Enthusiasm for owning/buying dollars also reflects our view that the dollar does best in a still-risky world.
A significant headwind for the dollar is that the Fed leadership (Chairman Bernanke and Vice Chair Janet Yellen) are still forensically focused on the weakness of the American labour market and hence are most unlikely to be moved from their open ended QE stance this year and – quite possibly – deep into next year. (...) The Fed keeps the theme of dollar debasement on markets' minds as they continue $85 bn per month in QE for the foreseeable future. But relative US interest rate support has steadily improved, mainly due to falling interest rates across the G10 while US interest rates have been largely unchanged. The USD is no longer the only major funder in the town.
But we still continue to forecast EUR declines against the dollar over coming months. Euro area growth is weak, chances are that ECB will be dragged back to the policy easing table and systemic risks around the EUR remain."