Author: Sarupya Ganguly
BANGALORE (Reuters) – A rising U.S. dollar will be resilient and could even trade stronger than forecast in coming months if the Federal Reserve and other major central banks diverge on policy, according to currency strategists polled by Reuters.
Recovering from a lull in late 2023, the dollar has defied with aplomb the dollar weakness forecasts made by strategists in Reuters polls over the past year and is already up 4.3% this year against a basket of major currencies.
In addition, the market is likely to trade higher than forecast over the next three months rather than lower, according to a Reuters poll conducted April 29-May 2 by nearly 75% of forex strategists (42 out of 58).
“We remain firmly convinced that the strong dollar will continue. A strong U.S. economy, as evidenced by economic activity indicators and more resilient inflation, will make it difficult for the Fed to begin cutting rates,” said Paul Mackel, global head of the monetary board. research at HSBC.
“As a result… the dollar will remain in an advantageous position against other major currencies in the coming months,” he added.
Fed Chairman Jerome Powell said Wednesday after the central bank’s latest meeting that policymakers will “take longer than previously expected” to gain adequate confidence in bringing inflation down to its 2% target, reinforcing remarks made in a recent speech.
According to CME’s FedWatch tool, financial markets are now pricing in a 56% chance of a first rate cut of at least 25 basis points in September, but a higher chance of a cut in November (68%), in line with economists’ forecasts in the FedWatch report. a separate Reuters poll conducted two weeks ago, and less than the six expected in January.
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This will lead to significant divergence in the policies of the world’s major central banks, which, after simultaneously raising rates to levels not seen in decades to combat runaway inflation, may begin cutting rates at different times.
The European Central Bank and Bank of England are expected to cut rates ahead of the Fed in June and August, respectively, according to separate Reuters research.
The average forecast of the 80 currency strategists who took part in the survey was for the euro to hold at its current level of $1.07 until the end of July and then rise only marginally to $1.08 in six months, compared with the $1.10 predicted in poll last month, and the weakest forecast last month. Reuters polls this year.
“We’re very surprised by the way (US) inflation has progressed – I would have expected it to be at least a couple of tenths of a percent lower by now,” said Steve Englander, head of G10 currency research at Standard Chartered (OTC). :).
“The reversal of Fed rate cut expectations has made a real difference – the (current) dollar strengthening episode appears to have more substance,” he added.
The Japanese yen, which had fallen about 10% for the year and hit a 34-year low of 160.03/$ earlier this week, has clawed back some of its losses on suspicions of intervention by Japanese authorities.
The study found it would strengthen only marginally to 152/$ by the end of July, but would then become one of the biggest performers among major currencies, rising about 8% to 143.67/$ over 12 months.
However, according to 13 of the 18 respondents to the follow-up question, it is more likely that the currency will trade weaker than forecast three months from now rather than higher.
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“As US yields rise and the dollar strengthens, the BOJ is actually trying to buy time to slow the pace of (recent) weakness until fundamentals begin to move in favor of a stronger yen,” Lee Hardman said. Senior Currency Analyst at MUFG.
(As for other stories from the May Reuters currency survey:)