UBS - The greenback back to 1.20 against the euro by the end of 2013?

UBS - "The Federal Open Market Committee's doves have been prominent in the last few days. Chicago Fed President Evans said he was comfortable with the current stance of US monetary policy. This was in contrast to Kansas City's George and St Louis' Bullard, both of whom had warned earlier this month about the risks of the Fed printing money again. Similarly, Boston Fed President Rosengren argued policy accommodation was 'absolutely needed' until the central bank met its mandates on employment and inflation. (...) Other non-voting FOMC members also spoke over the past week.
(...)The key view on the FOMC remains Chairman Bernanke's. In his latest speech Bernanke said the US was still 'in a relatively fragile recovery'. As a result the US dollar remains pinned down around 1.33 against the euro and 1.05 against the Australian dollar. Nevertheless, at these levels, currency markets are pricing in the Fed printing money throughout 2013 and into 2014. That suggests the underlying risks are to the upside for the dollar. As it becomes clear America's recovery is continuing this year, the Fed will need to reconsider its policy of purchasing assets.
(...) The fiscal cliff and, separately, the US debt ceiling remain the key tests for the economy in Q1'13. It was reported on Friday that House Republicans may propose a bill to raise the debt ceiling for three months - currently due to be hit sometime in March - provided the Senate passes a budget by the April 15 statutory deadline. UBS Economics suggests the Republicans want to forgo a fight on the debt ceiling but link it instead to long-term spending issues and the near-term fiscal cliff of automatic cuts due from March 1. Raising the debt ceiling will avert the disastrous threat of America defaulting. But it will still mean a very tough fight in Washington next month to avoid the automatic spending cuts due from March.
As a result investor confidence may still be damaged - paradoxically benefiting the dollar to start with. But if Congress does reach a deal, the improving US outlook suggests the Fed will be the first of the major central banks to tighten liquidity this year by slowing down or ending its asset purchases. That will push the greenback back to 1.20 against the euro by the end of 2013."

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