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The US dollar rally that began in mid-2014 has nearly run its course and will only gain slightly over the coming year, according to a Reuters poll of strategists who said risks to their forecasts are tilted more to the downside. The latest conclusions will likely have implications for the euro zone and Japanese economies, where officials have for a long time aimed to weaken their currencies in order to boost exports and shore up sagging growth and inflation.
Minutes from the Fed's March 15-16 policy meeting released on Wednesday suggested caution about raising rates due to concern among policymakers over their limited ability to counter the blow of a global economic slowdown. Citi says dollar appreciation "has gone out of fashion".
"The Fed remains dovish in the face of higher core inflation, the ECB has switched from FX to credit easing and the Bank of Japan revealed its preference - albeit at higher levels - for limited further yen depreciation," wrote analysts at the bank. The Bank of Japan adopted negative interest rates late in January, while the ECB delivered an unexpectedly aggressive barrage of stimulus measures last month. But those shock moves have done nothing to weaken the yen or the euro. Instead those currencies have strengthened, suggesting the effectiveness of such policy action is diminishing.
The euro last week rose above $1.14 for the first time in almost six months while the yen is at a 17-month high against the dollar, breaking below 109 for the first time since October 2014. The yen has risen despite verbal warnings from Japanese officials against its appreciation. A senior Japanese finance ministry official said on Thursday recent currency moves have been one-sided and that the ministry would take steps in the market as needed.
Outright bullish bets on the US dollar were slashed to the lowest in nearly two years, according to positioning data, which also showed speculators cut euro shorts to the lowest in almost a month. The latest Reuters poll of over 60 currency strategists is the fourth consecutive survey this year that forecasters have bumped up their euro calls. Still, the consensus is for the single currency to ease to $1.10 in three months from $1.14 it was trading on Thursday and to $1.08 in a year, around where it started 2016.
Just a few months ago, euro/dollar parity calls were on the rise, but have steadily fallen off the radar this year with only a handful of analysts sticking to that view, which they have been holding on to for over a year now.
Forecasts for the yen are also a lot stronger than was anticipated at the start of the year. Then, analysts were calling for the yen to fall against the dollar to 125 in 12 months. Now they are calling for it to weaken to 118 from 108 on Thursday. And while the consensus still points for the dollar to rise a bit in the coming year, nearly two-thirds, 25 of 43 analysts, said the forecast risks were to the downside.
"Monetary policies designed to stimulate economies have reached some of their limitations. Risks are piling up - diffuse and varied," wrote Jean-Francois Paren, head of global markets research at CA-CIB. Sterling has also taken a pounding this year as concerns have grown about a Brexit - Britain leaving the European Union. It could fall sharply if Britons vote to leave the EU on June 23, dragging the euro down a bit too, and can bounce on a vote to remain.

Copyright Reuters, 2016

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