UBS - "The bullish case for the dollar has been significantly boosted by Chairman Bernanke signaling the Federal Reserve is prepared to start slowing down its pace of asset purchases later this year and to freeze its balance sheet expansion altogether by the middle of next year. That is in line with our view that the Fed will be the first of the major central banks to exit unconventional monetary policy.
Unsurprisingly, higher yielding emerging market and commodity currencies have reacted worst. But we expect broad-based dollar strength against the rest of the major currencies too. US fund managers are likely to repatriate capital back home. Foreign central banks will have to 'rebalance' falling reserves - by selling euros, pounds and commodity currencies to rebuild their holdings of greenbacks that they use to defend domestic currencies - while sovereign wealth funds are likely to remain overweight dollars, as we found this week when visiting clients in the Middle East.
Thus we maintain our forecasts for the dollar to rise to 1.20, 110, 1.41 and 1.03 against the euro, yen, pound and Swiss franc by the end of 2013. This week's key points for currencies are:
- Fed gives dollar first mover advantage
- emerging market reserve rebalancing to weaken euro
- Japanese CPI key in the week ahead for yen
- departing Governor King still argues for more stimulus
- SNB sticks to script but continue to prefer EURCHF upside
- IMF to reveal commodity currency reserve allocations"