Dollar rally has long way to go

Diverging central bank policy has created a perfect launch pad for the dollar to move higher, particularly against the euro. The Fed is expected to push interest rates higher in the next several months, while the European Central Bank embarked on a quantitative easing bond buying program Monday.

“Year to date, the euro’s down 11 percent. This is only March. Do we have another 7 percent before the end of this year? I don’t see why not,” said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman. “We’re only about half way to where we’re going (against the euro). …There’s another 30 cents or so on the downside.”

Chandler said the euro could be setting up to retest its all-time low just above 0.82 to the dollar by 2016.

David Woo, currency and rates strategist at Bank of America Merrilll Lynch, said the winners and losers are lining up. For instance, the correlation between the rising dollar and and the S&P 500 has turned very negative over the past four to six weeks.

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“As the euro/dollar goes down it’s going to be deflationary for everybody else. It’s going to be bad news for emerging markets,” said Woo. He said China could possibly be forced to devalue its currency as the euro sags against the dollar. Europe is China’s biggest export market.

“That’s why it’s the currency wars. Someone wins. In this case, it’s clearly Europe,” said Woo, noting the U.S. stock market is flattish this year, while European equities are performing better.

Woo said Europe’s bond buying is pressuring the euro, and could continue to do so as foreigners sell bonds into the ECB’s QE program. He estimates as much as $ 120 billion euros could be sold annually due to QE. “If foreigners are selling the bonds, they’re selling euros, too. The actual start of ECB bond market purchases is going to generate euro selling,” he said.

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