BENGALURU, Nov 8 (Reuters) – The dollar’s recent weakness will continue for the rest of the year, according to a majority of foreign exchange strategists in a Reuters poll, who also said economic data was the main influencer for major currencies for the rest of the year will be 2023.
A stronger-than-expected U.S. economy and rising Treasury yields as the Federal Reserve raised interest rates to curb high inflation gave the dollar an unassailable advantage over its peers.
But renewed expectations that the Fed will be done with its interest rate hikes has put the dollar at a disadvantage, with the currency losing nearly 2.0% from last month’s peak, leaving the Dollar Index (.DXY) down about rose 2%.
A nearly two-thirds majority of analysts, 28 of 45, who answered a separate question suggested that the dollar’s current weakening trend will continue and said the dollar would likely trade below current levels against major currencies by year’s end.
They also expect it to slide against the euro and other G10 currencies over the next 12 months, a position that analysts have taken all year but have proven wrong each time. Some sound more confident this time that they will be right.
“The dollar and U.S. yields have been on a strong upward trend over the (past) two to three months… but it looks like we have reached a point where yields and the dollar have peaked,” Lee said Hardman, senior currency analyst at MUFG.
“This year it will be harder for yields to reach new highs because markets are now more confident that the Fed is done raising rates. Speculation has already increased again that we could see a reversal in Fed policy next year and speculation is increasing about more aggressive rate cuts from the Fed next year.”
When asked what will be the main influence on major currencies for the rest of the year, a slim majority of analysts, 26 out of 49, said economic data. Another 20 said there were interest rate differentials and three said it was safe haven demand.
Recent employment data suggests that the world’s largest economy’s surprising resilience to interest rate hikes over the past year and a half is finally starting to show cracks. But the US economy is still performing better than all of its competitors.
The latest data from the Commodity Futures Trading Commission showed that currency speculators were still overwhelmingly net-long on the U.S. dollar, suggesting there was still plenty of support for the greenback.
“We are currently still tactically on the dollar and expect this to continue through the end of the year, particularly against currencies that continue to have weak fundamentals. EUR/USD would be the main case for this,” said Simon Harvey, head of FX analysis at Monex Europe.
The euro zone economy shrank 0.1% last quarter and is expected to stagnate this quarter, narrowly avoiding recession. After making up for all of the year’s losses, the euro is expected to gain around 4.0% in the next 12 months.
Average forecasts from 72 foreign exchange strategists showed the common currency trading at $1.07, $1.08 and $1.11 over the next three, six and 12 months. These estimates are largely unchanged from an October survey.
The Japanese yen, the worst-performing major currency of the year, is expected to remain under pressure in the near term.
Asked what the yen’s weakest rate against the dollar would be by year-end, 20 analysts answering a separate question gave an average of 152/dollar.
However, the currency, which has lost about a third of its value since 2021, including 13% this year alone, is expected to recoup most of its losses from 2023 in the next 12 months.
According to the survey, the yen is expected to gain more than 10% and change hands at 136/dollar in a year.
Sterling, which has already risen around 1.5% in 2023, is expected to gain 3.5% to $1.27 in a year’s time.
Emerging market currencies are expected to continue making notable gains against the declining US dollar well into next year.
(More stories from November’s Reuters foreign exchange survey:)
Reporting by Hari Kishan; Survey by Sarupya Ganguly, Purujit Arun, Devayani Sathyan and Anant Chandak; Edited by Ross Finley and Mark Potter
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