Eurodollar will rise to 1.30 in early 2013, says Danske Bank

Danske Bank has topped this week's three-month currency forecast rankings after predicting aggressive monetary policy from the European Central Bank (ECB) and the Bank of Japan would drive both EUR/USD and EUR/JPY higher.

On August 24, with EUR/USD trading at 1.2514, Danske Bank accurately forecast the pair would rise to 1.27 in three months' time. By November 19, the euro had strengthened to 1.2773 against the euro, according to data from Thomson Reuters.

"We believed the Federal Reserve would come up with an aggressive monetary policy response. We also believed we would see a policy response from the ECB to stop the eurozone crisis from spiralling out of control, which we saw in September," says Arne Lohmann Rasmussen, chief analyst and head of rates, foreign exchange and commodities strategy at Danske Bank in Denmark.

"We were well aware the market was extremely short EUR/USD in August, so it was that combination of stressed positioning and believing we would see a strong ECB policy response to remove tail risk that led to our view of a supported euro," he adds.

Lohmann Rasmussen expects to see some support for the US dollar, but only in the short term as concerns about the fiscal cliff continue to dominate the market. The bank forecasts eurodollar will be at 1.26 in a month's time, but will rise to 1.30 in three months.

Danske was also accurate in its forecast that the yen would weaken substantially against the euro, having predicted on August 24 that EUR/JPY would rise from 98.26 to 105 in three months' time. By November 19, the pair was trading at 103.79.

Given how aggressively they are easing monetary policy in Japan at the moment, we believe USD/JPY and EUR/JPY will continue to move higher

The Bank of Japan is no longer trailing behind other central banks when it comes to monetary easing, the bank believes, and that trend will continue into 2013. Danske's three-month forecast for EUR/JPY is currently 110, rising further to 112 in six months.

"We believed GDP growth would likely slow in Japan during a weak fourth quarter, forcing the Bank of Japan to further ease monetary policy and become more aggressive. Given how aggressively they are easing in Japan at the moment, we believe USD/JPY and EUR/JPY will continue to move higher. We recommend euro-based clients hedge yen assets and income. We think the yen could be the big loser in 2013," says Lohmann Rasmussen.