BENGALURU, July 6 (Reuters) – The US dollar will hold up against most major currencies for the remainder of the year, despite expectations of a narrowing in interest rate differentials as the US economy remains resilient, according to a FX strategist interviewed by Reuters.
Though the greenback is still around 0.5% down against the major currencies this year, it has gained almost 1.3% in the past week alone as calls for a federal government interest rate cut ease and expectations of a recession in the US slacking off this year.
Several Federal Reserve officials, including Chairman Jerome Powell, have called for at least two more rate hikes despite the market expecting one more, also helping to support the currency.
The dollar is not likely to give up its recent gains anytime soon, according to a June 30-July 5 survey of 80 FX strategists, although some major central banks such as the European Central Bank and Bank of England will hike interest rates for longer.
“The tightening US job market could help the economy and the dollar in the near term,” said Kit Juckes, chief foreign exchange strategist at Société Générale. “Even if we see (interest rate) convergence, it seems unlikely that a new major euro uptrend will start without stronger growth.”
In fact, a majority of the joint contributors indicated that the six-month view of the dollar versus most major currencies was either upgraded or kept unchanged from the previous month.
Meanwhile, net USD short positions have declined since hitting a two-year high in May, according to the Commodity Futures Trading Commission.
Recent data showed that the world’s largest economy has remained stronger than expected, faring better than the euro zone, which slipped into recession earlier in the year.
“We see room for a short-term recovery in the dollar. The US economy looks in better shape than Europe and Asia, suggesting the Fed’s statement is a bit more credible than most,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
After rising over 2% in June, the euro, currently at $1.09, was expected to appreciate a little less than 1% to trade at $1.10 in six months.
Sterling, one of the best-performing G10 currencies this year, should change hands at $1.26, down slightly from the current level of $1.27.
A double whammy of high interest rates and stubborn inflation has already impacted economic activity in the UK.
When asked how the dollar would perform against the major currencies over the next three months, 45% of strategists, 27 out of 60 said it would stay in a range and 19 said it would strengthen. Only 14 said it was getting weaker.
“The dollar has a tailwind from the Fed… recent strength comes from an upward re-rating of the Fed (interest rate),” said John Hardy, head of FX strategy at Saxo Bank.
“But at the same time we have extremely strong global risk sentiment and the liquidity and financial conditions are very basic. This is usually related to dollar weakness. Those two things balance each other out.”
Reporting by Indradip Ghosh and Shaloo Srivastava in Bengaluru. Survey by Sarupya Ganguly, Anitta Sunil and Veronica Khongwir. Edited by Hari Kishan, Ross Finley and Matthew Lewis
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