By Sarupya Ganguly
BENGALURU (Reuters) – The U.S. dollar will maintain its recent strength in coming months on robust domestic economic data and continued scaling back expectations for interest rate cuts by the Federal Reserve, a Reuters poll shows.
Some analysts have attributed the dollar’s 4% rally in October to speculation about the likely outcome of the November 5 US presidential election. Others say the move is mainly due to resilient economic activity in the United States, particularly strong consumer spending and employment data.
The latest polls show a near deadlock between Democratic Vice President Kamala Harris and Republican candidate Donald Trump in the final leg of a hard-fought presidential battle.
Meanwhile, continued outperformance of the U.S. economy has prompted financial markets to price in a higher year-end Fed Funds rate than anticipated even a month ago. A separate Reuters survey of economists predicts two more quarter-point declines this year.
Based on interest rate differentials, it seems unlikely that the dollar’s recent momentum will dissipate any time soon. Fed peers, such as the European Central Bank, appear likely to be aggressive with rate cuts in the near term.
“In the US we started to get better economic data so we started to price in a more aggressive Fed compared to what we were before, and in Europe we started to get weaker data and so we started to price in a more dovish ECB” , said Dan Tobon. , head of G10 FX strategy at Citi.
“We’re really just looking for a dollar to accumulate in the election, then kind of turn around and then start turning sideways, as is happening now.”
The euro will trade around its current level of $1.09 in late November before rising about 1% to $1.10 over three months, according to the average forecasts of more than 70 forex strategists polled by Reuters from October 28 to 31 have been questioned.
Yet an overwhelming majority of 90% of respondents, 28 out of 31, to a supplementary question, predicted better dollar performance in the immediate aftermath of a Trump victory. According to the average reactions, in that scenario the coin is expected to gain another 1.5% and lose 1% if Harris wins.
“We see the risks for the dollar as asymmetrical to the upside in the event of a Trump win and a bit more status quo, perhaps a bit to the downside, in a Harris win,” says Alex Cohen, FX- strategist at Bank of America.
“That’s mainly due to trade and tariff policies in a Trump administration that could have a disproportionate impact on the dollar, sending it higher both from expected inflation and a trade perspective.”
While both Trump and Harris have proposed policies that could reignite price pressures, Trump’s policies of the two would be more inflationary, 39 of 42 economists said in a separate Reuters survey.
Still, the euro was forecast to rise to $1.11 by the end of April and then to $1.12 within a year, opinion polls showed.
“Our medium-term view on the dollar is that it should ultimately trade negatively in a soft landing environment. But given how strong US data has been lately, there are certainly additional upside risks to that forecast,” BofA’s Cohen added to.
