The US dollar, which has dominated the currency market for the past couple of years, is likely to maintain its position of strength despite diminishing returns from the most overcrowded trade of the year, a Reuters poll of strategists found.
The foreign exchange market will step into a brand new decade with no fresh sense of direction, in part because of little progress by Washington and Beijing in brokering a truce in their prolonged trade spat. "Fundamentally the dollar will remain strong against a whole basket of currencies because of the need for liquidity and safe haven...the promise of some yield from the US dollar is arguably better than no yield from Germany or the euro," said Jane Foley, head of FX strategy at Rabobank.
"I think the dollar might slip, but I don't see it plunging at all next year."
After months of collective optimism in the markets over a pending reprieve in trade tensions, US President Donald Trump on Tuesday said he was willing to wait until after the next US presidential election in November 2020 to ink a deal with China.
While global equity markets initially reacted sharply to the news, the dollar index, measuring the unit against a basket of six currencies, has barely moved.
Much of the limited reaction is likely down to still-widespread expectations the US will walk back from its planned imposition on Dec. 15 of fresh tariffs on Chinese goods.
"I would suggest it's more that the markets are basically adjusting to the rhetoric of Trump ... markets will only get upset if the negotiators say we're stopping again," said Tim Riddell, macro strategist at Westpac. Yet volatility, which traders thrive on and is currently at low levels for most major currencies, is not expected in the market any time soon. The dollar and the euro have traded in the tightest range in decades this year.
Indeed, a majority of analysts - 38 of 64 - who answered an additional question said current low volatility in most major currencies would last at least another three months. Seven said volatility would return in one month; 19 said it would take up to three months.
The US dollar, which has dominated currency markets and provided a sense of direction over the past couple of years, is also showing some signs of slowing down.
After gaining over 4% last year, the greenback has only eked gains of less than 2% so far in 2019, suggesting much of the trade deal news has already been baked into the currency and any further gains will be hard to come by.
While that is not to say the dollar is bound to weaken, there was no clear consensus among analysts on where the next boost to the world's top reserve currency was going to come from.
Currency speculators increased their net long dollar positions, taking the total value of bets to $20.11 billion from the previous week's $18.36 billion, according to the latest Commodity Futures Trading Commission data.
Among the 62 analysts who answered another question in the Reuters poll on what was most likely to dictate the US dollar's moves from here, 26 said developments in the US-China trade war with a similar number choosing US economic performance.
Seven chose economic performance of other major economies and the remaining three gave varied reasons. But with no other currency expected to challenge the greenback's strength, it is expected to stay relatively unscathed in the near future.
The euro, which has lost nearly 4% for the year until now, is expected to recover those losses over the next 12 months. The common currency is expected to end 2019 at $1.10, a level only a handful of analysts had predicted it would trade at in the January poll. The euro is then forecast to rise to $1.12 and $1.15 in the next six and 12 months.
After a broad decline in 12-month euro forecasts collected in Reuters polls over the last year and a half, they have steadily risen since October's poll. "I would say the story is more of the dollar kind of losing some of its attraction rather than the euro becoming much more attractive," said Lee Hardman, a currency strategist at MUFG in London.
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