By Sarupya Ganguly
BENGALURU (Reuters) – The U.S. dollar will remain strong in the coming months as financial markets continue to push back on expectations about the timing and size of the Federal Reserve's rate cuts, according to foreign exchange strategists polled by Reuters.
Despite a brief downtrend in late 2023, the greenback has gained about 3.3% against a basket of major currencies this year, with traders' positioning data showing net long bets on the dollar have reached their highest level since September 2022 .
A strong U.S. economy and persistent inflation have forced financial markets to rethink their bets on the timing of the Fed's first interest rate cut.
While markets currently estimate about a 60% chance of a cut in June, they have priced in rate cuts of about 75 basis points this year – which some policymakers consider “reasonable” and in line with the Fed's own forecasts stand.
But that's significantly less than the nearly 150 basis points of cuts that markets had expected at the start of the year, suggesting the dollar is likely to remain dominant in the near term.
None of the major currencies are expected to recoup their year-to-date losses against the dollar at least in the next three months, according to the Reuters poll from March 28 to April 3.
“Markets are gradually learning that this is not an environment where you can cut rates at any price, but rather an environment where there is no rush to adjust… That should continue to be the case for the dollar set a lower limit, at least until then “The relief from inflation will become more clearly visible,” noted Goldman Sachs strategists.
The euro, which traded around $1.08 on Wednesday, is expected to gain about 1.0% to $1.09 by the end of June, leading to a slight loss of 2.3% this year . The rate was then forecast to rise another 1.0% to $1.10 within six months, according to the average forecast of 90 foreign exchange analysts.
YEN REMAINS YOUR CURRENCY OF CHOICE
The battered Japanese yen, which has fallen nearly 25% since the start of 2022 and around 1% after the Bank of Japan (BOJ) raised interest rates last month for the first time in 17 years, is expected to be one of the biggest winners against the dollar Main currencies in the coming year.
The story goes on
The yen is currently trading at 151.7 per dollar and is expected to rise about 6.1% to 143 by the end of September, before rising another 2.9% to 139 in 12 months. The BOJ is forecast to make at least one more rate hike this year.
Still, the median of about 30 respondents to an additional question showed the yen, which hit a 34-year low last week, would be at its weakest, falling to 152 per dollar this month. Responses ranged from 151.8 to 155.0.
If realized, it could open the door to currency intervention by Japanese authorities, who recently said they could take “decisive steps” to address yen weakness.
The last time they intervened was when the currency fell to lows near 152 per dollar in October 2022.
When asked whether the yen was still the preferred funding currency for carry trades – borrowing in a low-interest currency to invest in a higher-yielding currency – a majority of nearly 90%, 26 of them, responded 30 that this is the case.
The remaining four chose the Swiss franc.
“The BOJ's removal of negative interest rate policy/yield curve control was widely publicized and essentially fully priced into the FX market…as a result, we got a classic 'buy the rumor, sell the fact' type reaction in the JPY,” said Alex Cohen, FX -Strategist at Bank of America.
“Carry is still a key factor for the yen, which should continue to be used as a funding currency. The transition from a slightly negative to a slightly positive key interest rate will not change this.”
(More stories from Reuters' April foreign exchange survey:)
(Reporting by Sarupya Ganguly; Analysis by Pranoy Krishna and Purujit Arun; Survey by Devayani Sathyan, Vijayalakshmi Srinivasan and Rahul Dushyantbhai Trivedi; Editing by Paul Simao)
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