By Sarupya Ganguly
BENGALURU (Reuters) – A rising U.S. dollar will hold firm and could trade even stronger than forecast in coming months if policies diverge from the Federal Reserve and other major central banks, currency strategists polled by Reuters said.
The dollar has bounced back from a lull in late 2023, confidently brushing aside strategists’ predictions for dollar weakness in Reuters polls over the past year, and is already up 4.3% against a basket this year of major currencies.
According to a nearly 75% majority of forex strategists, 42 out of 58, the price is also more likely to be higher than forecast rather than lower in the next three months, in a Reuters poll from April 29 to May 2.
“We remain steadfast in our belief that a strong dollar is here to stay. A strong U.S. economy, evident in activity data and more persistent inflation, will make it difficult for the Fed to start cutting rates,” said Paul Mackel, global head of FX. research at HSBC.
“As a result, the dollar will remain in pole 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 need “more time than previously expected” to gain sufficient confidence in inflation falling back to the 2% target, echoing comments in a recent speech amplified.
Financial markets are now pricing in a 56% chance of an initial rate cut of at least 25 basis points in September, but a higher 68% chance of a cut in November, according to CME’s FedWatch tool, in line with forecasts from economists in a separate Reuters survey two weeks ago, and lower than the six expected in January.
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That would lead to significant policy differences among the world’s major central banks, which, after simultaneously raising interest rates to levels not seen in decades to tackle runaway inflation, could start at different times economize.
The European Central Bank and the Bank of England are expected to cut rates before the Fed, in June and August respectively, according to separate Reuters surveys.
The average forecasts of 80 currency strategists in the poll were for the euro to remain at its current level of $1.07 until the end of July and then rise only slightly to $1.08 in six months, down from the $1.10 forecast in last month’s survey and the weakest forecast in the past six months. Reuters polls so far this year.
“We’re really surprised at the way inflation in the US has evolved – I would have expected it to be at least a few tenths of a percent lower now,” said Steve Englander, head of G10 FX research at Standard Chartered (OTC ). :).
“Reducing expectations of Fed rate cuts has made a real difference; (the current) episode of dollar strength appears to have more potential,” he added.
The Japanese yen, which has fallen about 10% this year and hit a 34-year low of 160.03/$ earlier this week, recovered some of its losses due to suspected intervention by Japanese authorities.
The rate will rise only slightly to 152/$ by the end of July, but will then be one of the biggest gainers among major currencies, rising about 8% in 12 months to 143.67/$, the survey showed.
However, the currency was more likely to trade weaker than forecast than stronger within three months, according to 13 of 18 respondents who answered an additional question.
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“With US yields rising and the dollar strengthening, the Bank of Japan is essentially trying to buy time to slow the pace of (recent) weakness until fundamentals start to move in favor of a stronger yen,” said Lee Hardman . senior currency analyst at MUFG.
(For other stories from the May Reuters currency survey:)
