• By announcing that it was inclined to keep interest rates low until late 2014, the Federal Reserve prompted us to push the first Fed rate hike to 2014, and as a result we’ve raised our end-of-2013 targets for dollar crosses. While the Fed’s announcement reinforced the long-term depreciating trend of the US dollar that won’t preclude bouts of US$ strength, particularly with the euro’s ongoing problems.

  • The recently announced European fiscal compact, while a step in the right direction in terms of the long term sustainability of the zone, presents formidable challenges to politicians as they attempt to implement the plan. And it’s not just politics that bring uncertainties. Having rejected the option of jointly issued Eurobonds, the zone will have to deal with funding pressures, particularly for the usual suspects, namely Portugal, Italy, Ireland, Spain and Greece. Talk of possible exits from the eurozone will remain an albatross around the euro’s neck, contributing to the common currency drifting towards our end-of-2012 target of 1.20 US$/€.

  • Assuming a global financial crisis is averted, expect the loonie to remain strong close to parity, buoyed by capital inflows, improving trade flows with a resurgent U.S. economy, and pared back expectations of Bank of Canada rate cuts.