A trader counts U.S. dollar banknotes at an exchange office in Peshawar, Pakistan September 15, 2021. REUTERS/Fayaz Aziz/File Photo
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BENGALURU, Aug 4 (Reuters) – The dollar’s strength has not yet peaked, according to a majority of currency strategists polled by Reuters.
The greenback slipped from a decade high in mid-July but quickly rebounded as three Fed officials made it clear that the central bank was “completely agreed” to hike interest rates to levels that marked the highest US inflation since the 1980s would dampen. Continue reading
With the Fed expected to stay ahead of its peers to some extent in the tightening cycle and the global economy set to slow significantly, it’s difficult to see a path for the dollar to weaken significantly or for most other currencies to come back.
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In the Aug. 1-3 poll, a strong majority of more than 70% of strategists, or 40 out of 56 who answered an additional question, said the dollar’s strength has not yet peaked.
When asked when the peak was reached, 14 answered within three months, 19 within six months, another six within a year and one within two years. Only 16 said they had already done so.
“For the USD to weaken, the Fed needs to be more concerned about growth than inflation, and we’re not there yet,” said Michalis Rousakis, G10 FX strategist at Bank of America Securities.
Reuters Poll – US Dollar Outlook
The dollar – already up around 11% in 2022 – should give up some of its gains over the next 12 months. However, few of the major currencies were forecast to recoup all of their year-to-date losses over this period.
“In the very long term, say two, three, four years, the dollar is likely to be significantly weaker. But on a 12-month time frame, we’re looking at relatively small moves,” said Brian Rose, senior economist at UBS Global Wealth Management.
DETERIORATED OUTLOOK
The euro reached parity with the dollar last month, hitting levels nearly two decades low and is down more than 10% in 2022. It has been forecast to gain over 6% from current levels by next July and is expected to trade around $1.02. $1.05 and $1.08 over the next three, six, and 12 months, respectively.
Those median forecasts, the lowest in a Reuters FX poll since 2017, showed a deteriorating outlook for the shared currency.
While only a handful of analysts in a July poll expected the euro to trade at or below par against the dollar over the forecast period, about a third of the 60-plus strategists now forecast it will regain those levels over the next three months .
“In the short term, we expect the dollar to maintain strength, particularly against the euro. So we think the euro could fall below parity,” Rose said.
Despite its recent rally as US Treasury yields plummeted, the safe-haven Japanese yen is down about 14% for the year, making it the biggest loser among its major peers.
The carry trade currency was expected to recoup some of those losses and gain about 5% to trade around 127 per dollar in a year.
“I think the most relevant question in relation to the dollar is whether you’re going to sell the dollar, what else are you buying…you’re not going to buy a lot of yen versus the US dollar when you’re getting a much higher yield in.” dollars,” said Jane Foley, head of FX strategy at Rabobank.
The yield advantage that dollar investing brings is also likely to hurt emerging market currencies and offer no respite to an already battered bunch.
While China’s tightly controlled yuan and Korean won would range in the next three to six months, the Indian rupee, South African rand, Russian ruble and Turkish lira were expected to fall.
Phoenix Kalen, head of emerging markets research at Societe Generale, has compiled a long list of concerns about these currencies.
“For EM-FX, we are less encouraged by the decline in market pricing for FOMC rate hikes and are more focused on the underlying context of deteriorating global growth, tightening financial conditions, deteriorating geopolitics, ongoing outflows from EM Portfolios that are still elevated are inflation and the potential for surprises in China,” Kalen said.
(For other stories from Reuters August foreign exchange survey 🙂
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Reporting by Hari Kishan; Additional reporting by Vuyani Ndaba and Vivek Mishra; Survey by Aditi Verma and Susobhan Sarkar; Edited by Ross Finley and David Holmes
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