The case for being bullish about the dollar – which has risen against an increasingly sickly euro in recent weeks – looks intact, and the euro could fall as low as $1.10 by next year from the current level of around $1.19, according to Merrill Lynch Wealth Management.

“It is a case of the US dollar still standing supreme. Fragmented policy response across the euro zone, selling by foreign exchange reserve managers, and risk around the euro zone banking sector are expected to drive the euro down to $1.15 and $1.10 by the end of this and next year,” the wealth manager said in a note.

Merrill said it also expects sterling to fall against the dollar to $1.38 in 12 months time – it currently trades around the $1.44 level.

As far as upside potential is concerned, Merrill is bullish on the Russian ruble and the Korean won. As for the Chinese currency, the US firm predicts the renminbi will rise by 5 per cent against the dollar by the end of this year.

Although news events are positive for the US currency, the Merrill report noted that some recent economic data from the world’s largest economy had been negative for the exchange rate. For example, there was a small decline in the US Institute of Supply Management (ISM) manufacturing index to 59.7 in May, after rising to 60.4 in April.

It also pointed out that there are worries about China, as demonstrated by repeated sharp falls in the Shanghai Stock Exchange index. “Now, with house prices growing at over 12 per cent on the year (as of April 2010), policymakers are again taking measures to slow down this growth, which are already having consequences for broader growth,” the report said.

It said that a slowdown in China will curb demand for commodities, particularly metals, with industrial materials taking the biggest hit. To highlight what is at stake, China accounts for 65 per cent of global iron ore demand; for steel, zinc, and lead the numbers are around 40 per cent, and over 30 per cent for copper.