Dollar to hold steady in the year ahead, risks to the downside

The dollar is forecast to strengthen slightly over the coming 12 months, but analysts polled by Reuters say the risks are skewed more to the downside on growing expectations the US Federal Reserve may not hike interest rates at all this year.
While the Fed's upbeat tone on the economy last week left many confident a rate hike is on the way soon, weaker-than-expected economic data since then and top Fed officials urging caution have pushed back expectations yet again.
That pull-and-push after the Fed took its first baby step last December to raise rates from the zero bound has restrained the dollar so far this year, down 3 percent in 2016 after racking up a 20 percent gain over the prior two years.
Still, the latest poll of more than 60 foreign exchange strategists showed dollar gains will be slow and gradual against major currencies, apart from the British pound, and especially so in the run-up to the US Presidential election in November.
"With the Fed looking like the only central bank to raise rates, what the Fed does and doesn't do is going to remain a primary consequence (for the dollar)," said Jane Foley, senior FX analyst at Rabobank.
"But we do have the US elections, and that for some months could be a crucial factor."
While currency speculators increased their bets in favour of the US dollar at the expense of the euro and sterling to the highest since February, analysts in the poll were split on where these flows would go.
But with expectations for still more easing from the ECB, the euro is forecast to weaken slightly to $1.10 in a month from $1.12 on Wednesday. It is expected to weaken further to $1.08 in three months and to $1.07 in a year.
Those findings are similar to a poll last month, but the number of analysts now calling for the euro to fall to or below parity with the dollar has decreased to just three.
For sterling, the story is worse compared to last month. The pound's slide since Britain voted to quit the European Union is not over, and it is set to shed another 6 percent, according to foreign exchange strategists who have been very accurate about sterling's woes so far.
But strategists are sticking to their forecasts for a weaker yen despite the Japanese currency's blistering near 20 percent rally this year.