21 Jan 2015 10:19

Only Fed can stop dollar - Strategy Report

Monetary policy continues to play an overwhelmingly important role in currency markets, while foreign exchange markets are perhaps more important for central banks now than ever before. Exchange rates will therefore remain volatile, according to SEB's latest Currency Strategy report.

Looking ahead, the European Central Bank will likely be forced to expand monetary policy more quickly than what is currently anticipated, and this will continue to weigh on the euro. Across the ocean, only a dovish U.S. Federal Reserve is likely powerful enough to pause and temporarily correct the stronger U.S. dollar trend. 

"Although a potential upward correction to the presently collapsing oil price may also reverse current one-way traffic in the greenback, we see little likelihood that either event will take place. However, a stronger U.S. dollar limits how far and how rapidly the Fed can raise interest rates," says SEB's Chief Currency Strategist Carl Hammer.

In Scandinavia, the Swedish krona is expected to soon bottom out against a falling euro, while the Norwegian krona looks unlikely to appreciate in the coming months due to a falling oil price and monetary easing by Norway's central bank.