The battered US dollar is unlikely to rebound this year, even though the Federal Reserve is expected raise interest rates at least three times, according to a Reuters poll of strategists, who aren't expecting any major moves either.
Rising US wage inflation and expectations for an end to European Central Bank stimulus hit bond markets and nudged US Treasury yields up to four-year highs last week, leading to the worst sell-off in stock markets in six years. Although bond yields have pulled back from those peaks, they remain elevated and are not expected to return to previous lows. But the rout across world stocks had only a muted effect on currencies, leaving the weak dollar trend intact.
"I think this is actually a very interesting time for the dollar because we have yields potentially pushing higher in the US, which should be dollar-positive and also if there is a re-assessment of risks ... then there could be additional demand for dollars," said Jane Foley, senior FX strategist at Rabobank.
"At the moment, we probably have a correction in equity markets and not a broad-based rout and re-assessment of risk ... what we have is a slightly bolstered view on the US dollar versus some of the crosses, but I don't think we are going to see a big increase in demand for the dollar."
The latest poll of nearly 70 foreign exchange analysts showed the dollar, which turned in its worst performance for the month of January in 30 years, is forecast to weaken slightly against most major currencies over the coming year. The dollar index is forecast to end this year at 88.7, compared with 89.9 on Wednesday.
"No change to our medium-term bearish dollar view," noted Citi's global head of macro strategy and asset allocation, Jeremy Hale. He cited the turnaround and a pick-up in growth rates in Europe, Japan and emerging markets, along with "a much less accommodative" ECB policy stance this year and beyond as some of the main reasons.
Currency speculators, too, have increased their bets against the dollar to the highest since October, according to the latest data from the Commodity Futures Trading Commission. Among 58 strategists who answered an extra question on what might drive the dollar this year, about a fifth said sharp moves in US asset prices and over half said a shift in interest rate differentials.
Only a handful said either the lack of any coherent dollar policy from the current US administration or the Trump government's tax cuts would drive currencies. Separate Reuters polls show the Fed will raise interest rates three times this year, in line with the central bank's own dot plot projections. Federal funds futures have vacillated between four hikes and two during the recent market rout.
For its part, the European Central Bank is expected to shut the door on its multi-billion euro a month bond purchases programme this year, with a majority of economists saying that ought to happen much sooner. The euro has risen against the dollar on those expectations, which would bring closer the date when the ECB can start closing the interest rate gap with the United States.
Having recorded its best monthly performance in January against the dollar since its inception, the euro is forecast to gain. But the expected percentage rise is similar to last month's poll, suggesting the move is only a reflection of the actual move in January and not an upgrade.
The single currency is forecast to trade at around the current level of $1.23 in a month, $1.24 in six and $1.25 in a year. While predictions across the forecast horizon are the highest in over three years, the 12-month euro forecast suggests a gain of a touch over one percent from here, similar to what was forecast in the January poll.
But if there is any further spike in the euro as seen in January, then it could discomfort the ECB. ECB policymakers have already voiced concerns on euro strength. They will become even more uncomfortable if the single currency rises to $1.30, a five percent rise from here, according to the median of over 40 analysts who answered an additional question.
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