By Sarupya Ganguly
BENGALURU (Reuters) – The U.S. dollar will recoup some of its recent losses over the next three months on expectations that financial markets have once again gone too far in pricing in too many Federal Reserve interest rate cuts this year , according to a Reuters poll among currency strategists found.
After rising about 5% this year, the dollar has lost more than half its gains against a basket of major currencies in recent weeks, amid sluggish US economic data that raised expectations of multiple interest rate cuts from the Fed, which were due to start in September.
Much of these losses were due to weaker-than-expected jobs data on Friday, which prompted financial markets to forecast a total of about 120 basis points of rate cuts at the three remaining Fed meetings this year, compared with 50 basis points in just one couple of weeks. past.
Several major banks, including Primary Dealers that deal directly with the Fed, followed suit, predicting more rate cuts than previously expected.
But as policymakers push back against speculation that recent weakness in economic data would translate into a recession, markets could once again be forced to temper their expectations for rate cuts.
Currency strategists predicted in the Reuters monthly poll, conducted from August 1 to 6 following the recent market turmoil, that the euro, currently around $1.10, would fall around 1.4% to $1.08, before rising to current levels within six months. to $1.11 in a year.
“Our strong dollar argument has certainly taken a big hit in terms of confidence, but is its strength really over? That’s not our call,” said Paul Mackel, Global Head of FX at HSBC. “Our recession indicators aren’t flashing red. And even when the U.S. economy loses momentum, that usually means bad news for other economies. The dollar does better in that environment.”
“Is the market getting carried away? Of course I would say yes, but it’s hard to get in front of that speeding train in the very short term because these types of overreactions can continue,” Mackel added. “You have to be very careful when volatility is so high and you’re not used to volatility returning so quickly.”
LARGE CUT
The Japanese yen, which began its latest upward march against the US dollar after the Bank of Japan raised its overnight call rate to 0.25% on July 31 and announced a major cut in its asset purchases, reached a high point in seven months at 141.7. /$ on August 5. It will hold on to its recent gains to trade at 144/$ a year from now, the survey showed.
However, some FX analysts attributed much of these gains to traders unwinding large amounts of carry trades – where investors borrow from economies with low interest rates to finance investments in higher-yielding assets elsewhere – causing the stock market index to fall by more than 12%. Monday and Tuesday up more than 10% again.
The latest positioning data from the Commodity Futures Trading Commission (CFTC) before the recent market volatility also showed that speculators had slightly increased their net long bets on the US dollar.
Forecasters from previous Reuters polls, who for years stuck to their expectations of a weakening dollar, were divided when asked whether the dollar was more likely to trade stronger or weaker than they had predicted for the rest of the year. A slight majority, 32 of 62, said stronger, while 30 said weaker.
“Putting aside recent developments for a moment, we are generally in the soft landing camp and believe that once the US economy starts to recover with the rest of the world’s economies, we will see the outperformance of the dollar and, more importantly, its overvaluation. Going forward, we will normalize a bit,” said Alex Cohen, FX strategist at Bank of America.
(Click here for other stories from Reuters’ August exchange rate survey)
