The US dollar is likely to drift higher into next year as the Federal Reserve forges a lone but gradual path toward higher interest rates, according to foreign exchange strategists polled by Reuters.
The run-up to and immediate aftermath of the US presidential election on November 8 could still pose some near-term risk to the currency, but a narrow range of forecasts among the bulk of the more than 60 participants surveyed on October 26-31 suggests much of that has already been factored in.
The dollar unexpectedly rallied more than 3 percent in October, hitting a near nine-month high against a basket of currencies on the back of solid US economic data.
That has bolted down expectations among traders and analysts for the Fed to finally deliver an interest rate rise in December, a year since the last one and following much hesitation and many delays throughout 2016.
As those expectations have firmed, strategists do not expect the currency to rally much further in the year ahead, although with no other major central bank about to raise rates, the path of least resistance should be upwards.
"While we can't foresee the next global risk flare-up ... we judge that prospective Fed tightening will become a more consistent driver of US dollar strength," wrote Benjamin Reitzes, senior economist at BMO.
"But with tightening prospects having dimmed meaningfully from where they stood amid lift-off, we doubt the greenback will revisit January's peak anytime soon."
The latest poll predicted the euro would trade at around $1.09 in one, three, six and 12 months, about where it was on Monday and also where the common currency started in 2016.
While currencies are rarely that stable, it gives an idea of how comfortable many strategists are with the current rate. The range of forecasts on the 12-month horizon was 0.95 to 1.20.
Still, more than one-third of the strategists who answered an extra question said the risks to their dollar forecasts were more to the upside over the coming year.
Currency speculators also increased their bets in favour of the dollar for a fifth straight week and to the highest since late January, according to data from the Commodity Futures Trading Commission released on Friday.
"USD gains are likely to continue ... With the market pricing not even a full hike over the course of 2017, risk-reward is skewed toward the central bank sounding more hawkish, which would push USD higher," wrote Hans Redeker, global head of FX Strategy at Morgan Stanley.
While the Bank of Japan has expanded on its already massive stimulus this year, the yen has surged more than 12 percent against the dollar, defying a drumbeat of predictions for a weaker yen that has gone on for years now.
"The Japanese yen continues to defy logic. It rallies not only when there is a flight from risk, but also when the BoJ eases," noted BMO's Reitzes.
The yen is forecast to weaken about 1.3 percent to 106.3 against the dollar in a year from around 105.0 on Monday. BMO also expects it to weaken.
The BoJ began its two-day policy review on Monday and was widely expected to stand pat.
Meanwhile, sterling's crash of almost 20 percent against the dollar since Britons voted to leave the European Union is not over yet. The pound is predicted to lose another 5 percent after Britain starts its formal process to quit the EU. While forecasts were sharply revised lower from last month, sterling is not expected to weaken to parity with the euro.
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