The 0.2 percent tumble the euro took against the dollar Tuesday is its first fall in five days, but doesn’t unseat it from being the top currency in 2013. Year-to-date, the euro gained 4.5 percent against the dollar. Kathleen Brooks, research director at Forex.com in London, explained in a note to clients that the modest reduction in bond-buying by the Federal Reserve ($75 billion per month versus $85 billion) does not stop the Fed from having an expanding balance sheet, unlike the shrinking balance sheet seen at the European Central Bank. MarketWatch provided portions of the note.
“Once the Fed’s balance sheet starts to contract then we could see the dollar strengthen sharply, although this is unlikely to happen at all next year,” Brooks said. She also explained that the steady balance sheet kept by the Bank of England will contribute to the British pound gaining 1.9 percent against the U.S. dollar.
The dollar is on track for the biggest gain against the yen since 1979, but the euro has also showed strength against the Japanese currency, with a 26 percent gain for the year. Paul Chappell, CIO of hedge fund manager C-View told Reuters that currency results in the coming year will “be very data-dependent.” Chappell added that currently, it “looks like U.S. numbers are going to be relatively robust compared with some other G7 peers, so the dollar is likely to be relatively robust versus other developed country currencies.”