Traders may be scrambling for dollars out of necessity in 2015 whereas this year, it could be argued, the market simply viewed buying the currency as a profitable transaction. In both cases the dollar rises, but there is a big difference in trader behaviour. A buyer driven by wants rather than needs may have room to wait for better levels before pitching in.
When foreign exchange traders need to buy a currency, the old adage clicks in: if you don't like the first price you could have dealt on, you will hate the second. That was evident early last week when the rouble slid against the dollar and, for many reasons, the market decided that Russia's currency was to be sold whatever the price.
One factor cited, though not confirmed, was that Russia's top oil company Rosneft may have had to buy dollars versus roubles to help fund an around $7 billion part repayment of a bridge loan made on Monday. Albeit perhaps in not so dramatic a fashion, the sight of traders racing to buy dollars versus roubles may be symptomatic of dollar demand to come. That would further discredit the idea, widely discussed in recent years, that the dollar was in long-term decline, partly replaced by the euro as a reserve currency.
The US trade deficit with the rest of the world is financed by the export of dollars to make up the difference, helping provide greenback liquidity globally. Meanwhile, the US Federal Reserve's monetary policies were more expansive than those of other major central banks. Cheap borrowing costs and the feeling that dollars borrowed today would be easier to repay, as the greenback would have fallen in value against the borrowers' home currency, have helped fuel a massive global dollar-denominated debt mountain.
So what could possibly go wrong? The European Central Bank is increasingly expected to engage in quantitative easing in early 2015, expanding monetary policy as the US central bank, having ended its own asset purchase programme, tiptoes toward policy tightening.
The yen has already fallen in value as a side effect of the Bank of Japan's ultra-accommodative monetary policies that are likely to be maintained in 2015. The US trade deficit has shrunk somewhat in recent years as rising domestic shale oil and gas production has meant lower US hydrocarbons imports. That means fewer dollars being exported to cover the deficit. Euros and yen will likely be plentiful, but dollars may well be less so, and, as was the case with Rosneft, it is greenbacks that are generally required to pay back debt. That need to buy could well prove the driver of further dollar gains in 2015.
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