A stronger euro, a higher cost of debt and slower economic growth worldwide are likely in the months ahead. These predictions are contained in Ulster Bank's mid year Outlook report, published today.
Ulster Bank's Financial Markets Strategist, Niall Dunne, says that for the past six months, the US had led something of a 'fairy tale existence'. He says that despite rising deficits, soaring energy costs and a lacklustre labour market, the US economy has come through its soft patch and is currently growing at a faster rate than normal.
However, risks do remain which might threaten this fairy tale existence. An oil fuelled downturn in US consumer confidence could have bearish repercussions for the dollar is economic growth slows. A continued rise in energy costs could also worsen the US trade deficit - this could also have a negative effect on the dollar.
The impact of China's currency revaluation could also hurt the dollar, Dunne warns.
'We see the euro rising to €1.32 by year end,' Dunne says. 'We would caution businesses with dollar receivables to consider hedging at current exchange rates,' he advises.
The Ulster Bank's Outlook also says that euro zone interest rates could catch up with the Bank of England's monetary policy. He says that the ECB could paradoxically be forced to tighten euro interest rates, even if oil prices rise further and the euro zone economy fails.
'We look for a 0.25 point hike in the next six months,' Dunne says.