Stronger US Dollar Will Impact Global Currencies in 2014

The prospect of a US Federal Reserve stimulus taper this year sent many currencies on a rollercoaster ride, and the volatility could extend into 2014, according to analysts.

Mitul Kotecha, head of global markets research Asia at Credit Agricole, said higher US yields, strong economic growth and higher capital flows back into the world's leading economy would together boost the US dollar in 2014.

Kotecha said the Japanese yen, which has lost some 20% against the greenback so far this year; and the euro, which has added 3.7% against the greenback, are among the major currencies anticipated to fare the worst amid a stronger dollar.

The dollar-yen would reach 115 by the end of 2014, while the euro-dollar could trade at 1.28 within a year, Kotecha told CNBC.

Sean Callow, senior currency strategist at Westpac Global Markets Strategy Group said the euro could "fall substantially" in 2014.

Westpac analysts attributed the euro's expected drop to relatively weaker eurozone growth momentum, which could force the European Central Bank to further loosen its monetary policy just as the Fed trims its $85bn-a-month asset buying stimulus.

Meanwhile, Chris Weston, chief market strategist at IG Markets also said the euro-dollar could wane to 1.28 by the end of 2014.

Westpac also said it expected Northeast Asian currencies, such as the Chinese yuan and the Taiwan dollar, to do better than Southeast Asian currencies.

Emerging Markets

Elsewhere, emerging market currencies such as the Brazilian real, the Indian rupee, the Indonesian rupiah, the Turkish lira and the South African rand are expected to log their worst declines against the dollar, owing to "capital outflows" from emerging economies and "external vulnerabilities", according to Kotecha.

However, IG Markets' Weston said he did not foresee emerging market currency declines to being as extreme in 2014.

Commonwealth Bank of Australia said in a note to clients: "The ECB's easing bias should continue to cap front-end core eurozone bond yields. The core eurozone-US two-year bond yield spread has been a solid reliable guide to EUR/USD direction.

"The bond spread should therefore remain in negative territory and help guide EUR/USD modestly lower over coming quarters. We see the EUR/USD drifting down towards 1.31 mid 2014."

Commonwealth Bank of Australia said in a separate note: "While we think the decline in the JPY is structural, the BoJ's new aggressive policy stance may accelerate the decline."

"Over the medium-term, as the BoJ doubles its purchases of JGB's, real Japanese bond yields should lag the eventual move up in global bond yields."

"In turn, this may indirectly encourage some Japanese participants to seek higher offshore yields and/or Japanese banks increase offshore lending. We see the USD/JPY reaching 103 by mid 2014."

The Fed could unwind its bond purchases in $10bn tranches over the next seven meetings before terminating the program in December 2014.

The median forecast in a Bloomberg poll of 41 economists matched the $10bn (£6.1bn, €7.3bn) reduction announced on 18 December.