All Roads Lead To Strong U.S. Dollar: FX Strategists
The dollar will remain a force to reckon with over the remainder of this year and into the next as U.S. interest rates rise and the economy outperforms its peers, reinforced by its safe-haven appeal when investors choose to worry, according to a Reuters poll.
Backed by a strong U.S. economy still creating jobs at a consensus-beating pace, the Federal Reserve has ramped up its fight against inflation by hiking interest rates much quicker than most of its peers. That has helped the dollar turn in one of its best performances in at least a decade.
The dollar index which was up around 15% for the year touched a fresh two-decade high of 110.55 on Tuesday.
With most outcomes like higher interest rate differentials and safe haven moves expected to favour the dollar, the currency is likely to remain strong for longer.
"The dollar between now and at least the end of the year will remain stronger across the board," said Roberto Mialich, currency strategist at UniCredit.
"At the current juncture, the Fed, focusing more on economic growth than inflation would probably be the only reason why the dollar might change its current trend... also the dollar might also benefit from its safe-haven status."
But beyond 2022, the dollar was expected to give up some of those year-to-date gains, the Reuters Sept. 1-6 poll of 70 foreign exchange strategists showed.
However, those predicted gains for other currencies would fall short of making up for their current year-to-date losses.
While the dollar has dominated nearly every currency tracked by analysts and traders it has performed particularly well against the euro, the Japanese yen and the British pound.
All three currencies have either touched multi-decade lows or were close to doing so.
The euro already down 13% for the year hit a two-decade low of $0.9876 on Monday as the prospects for a winter without Russian gas sunk in.
It was expected to trade below parity over the next three months, suggesting the 75 basis point European Central Bank rate hike forecast for its Thursday meeting would do little to reverse the euro's fortunes. [ECILT/EU]
The common currency was forecast to trade around $1.02 and $1.06 in the next six and 12 months respectively. If realized, those expected gains of around 3% to 7% would fall short in making up for the 13% decline for the year.
Those median forecasts for one, three and six month horizons were the lowest in nearly two decades.
"If the ECB goes with 50 bps, we would be concerned markets will see them as not committed enough to fighting inflation... A 75 bps hike is not frontloading in our view, but a long-overdue catching up from well behind. The ECB has a lot more 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 much more, in our view. The EUR needs strong statements from (ECB President Christine) Lagarde that the ECB will do whatever it takes to bring inflation down to the target."
The Japanese yen, down about a fifth and the worst underperformer among majors for the year, was expected to recoup about half of those losses to trade at 127.0 per dollar in a year. It was last trading around 142 against the dollar.
Britain's struggling currency won't regain its losses against the U.S. dollar anytime soon as steep interest rate increases from the Bank of England fail to offset an expected recession and increased government spending. [GBP/POLL]
Sterling, down about 15% this year, was expected to hover at the $1.16 it was trading around on Tuesday in one and three months time.
In six months the pound will have risen to $1.18 and in a year to $1.23, the poll found, still far short of the around $1.35 it started 2022.
(For other stories from the September Reuters foreign exchange poll:)
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