All Roads Lead to a Strong US Dollar: FX Strategists

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BENGALURU – The dollar will remain a force to be reckoned with through the rest of this year and into next as U.S. interest rates rise and the economy outperforms its peers, bolstered by its safe-haven appeal when the investors choose to worry, according to a Reuters poll.

Supported by a strong US economy that is still creating jobs at a faster than consensus pace, the Federal Reserve has stepped up its fight against inflation by raising interest rates much faster than most of its peers. This helped the dollar achieve one of its best performances in at least a decade.

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The dollar index, which was up about 15% for the year, hit a new two-decade high on Tuesday at 110.55.

With most outcomes such as higher interest rate differentials and safe-haven measures expected to favor the dollar, the currency should stay strong for longer.

“The dollar through at least the end of the year will remain stronger across the board,” said Roberto Mialich, currency strategist at UniCredit.

« In the current environment, the Fed, focusing more on economic growth than inflation, would probably be the only reason the dollar could change its current trend…the dollar could also benefit from its safe haven status. . »

But looking beyond 2022, the dollar is likely to give up some of those year-to-date gains, the Sept. 1-6 Reuters poll of 70 currency strategists showed.

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However, these expected gains for other currencies would not be enough to offset their current year-to-date losses.

While the dollar dominated nearly every currency tracked by analysts and traders, it performed particularly well against the euro, Japanese yen and British pound.

All three currencies hit multi-decade lows or were on the verge of doing so.

The euro, already down 13% for the year, hit a 20-year low of $0.9876 on Monday as prospects for a winter without Russian gas crumbled.

It was expected to trade below parity over the next three months, suggesting that the European Central Bank’s 75 basis point rate hike scheduled for its meeting on Thursday would not do much. thing to reverse the fortunes of the euro.

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The common currency is expected to trade around $1.02 and $1.06 over the next six and 12 months respectively. If they materialize, these expected gains of around 3% to 7% would not be enough to offset the 13% decline for the year.

These median forecasts for one-, three- and six-month horizons were the lowest in nearly two decades.

“If the ECB opts for 50 basis points, we would be concerned that the markets would see them as not sufficiently engaged in the fight against inflation… A hike of 75 basis points is not frontloading in our opinion, but a long overdue catch-up. The ECB still has a lot to do, » said Michalis Rousakis, G10 FX strategist at Bank of America Securities.

“Still, this may not be enough to support EUR/USD. Communication will matter a lot more, in our view. The euro needs strong statements from (ECB President Christine) Lagarde, that the ECB will do everything in its power to bring inflation back to target.

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The Japanese yen, down about a fifth and the worst underperformer among the majors of the year, is expected to recoup about half of those losses to trade at 127.0 to the dollar year-on-year. It was last trading around 142 against the dollar.

Britain’s troubled currency won’t regain its losses against the US dollar anytime soon as sharp interest rate hikes by the Bank of England fail to offset the expected recession and increased government spending.

The British pound, down about 15% this year, is expected to hover around the $1.16 around which it traded on Tuesday in a month and three months.

Six months from now the pound will have risen to $1.18 and in a year to $1.23, according to the poll, still a far cry from the roughly $1.35 it started in 2022.

(For more stories from Reuters’ September FX Poll:)

(Reporting by Hari Kishan; Additional reporting and analysis by Indradip Ghosh; Polling by Aditi Verma, Milounee Purohit and Susobhan Sarkar; Editing by Ross Finley and Jonathan Oatis)