The dollar’s retreat in foreign exchange markets is temporary, according to a Reuters poll of currency strategists, who said the greenback still had enough strength left to reclaim or surpass its recent highs and resume its relentless rise.
Up around 16.0% for the year, the dollar has come off an over-two-decade peak it hit in September, as the U.S. Federal Reserve, which powered the currency’s rally, was expected to be nearing the end of its interest rate tightening cycle.
The Fed is widely expected to raise its benchmark rate by 75 basis points on Wednesday, its fourth jumbo increase in a row. However, for the December meeting interest rate futures showed a split on the odds of a 75 or 50 basis point increase.
Over a two-thirds majority of analysts, 30 of 44, who answered an additional question in a Reuters Oct. 28-Nov. 1 poll said the dollar would either reclaim its recent highs (22) or move past them by end-year (8). The remaining 14 said it would fall from its current levels.
“Everybody’s talking about a pivot, whether or not after we get this week’s meeting over and done with the Fed will be able to move by less. But I fail to see that as being a factor which is going to significantly undermine the dollar,” said Jane Foley, head of FX strategy at Rabobank.
Foley also said investors need to get into riskier currencies for the dollar to weaken significantly and added “as long as the Fed is still hiking, even by small increments, I don’t think that environment would be there.”
GRAPHIC: U.S. dollar outlook for end-2022
The poll also showed most emerging market currencies, which have hit their lowest levels in at least a decade, were expected to remain around those levels or sink deeper over the remainder of the year and into early next.
While the dollar was expected to remain defiantly strong in the near-term, the 12-month outlook was still for the currency to cede some ground to its peers.
“We still see the dollar as toppish, which doesn’t mean that it couldn’t go up another percent or two – which likely means going up a couple of percent against some currencies and maybe being flatter or even falling against some others,” said Steve Englander, head of G10 FX strategy at Standard Chartered.
The euro, down over 13% against the dollar and less than 1% away from its worst annual performance since the currency’s inception in 1999, was expected to remain under pressure over the next three months.
The common currency, which has mostly traded below parity against the dollar since August, was forecast to stay there over the next three months and to trade at an equal footing against the greenback only in six months.
It was then expected to climb higher to trade around $1.04 in a year.
Those six and 12-month median forecasts were a slight upgrade from the October poll and the first since April.
The Japanese yen, down nearly 22% for the year, was expected to claw back about half of this year’s historical losses over the next 12 months. It was expected to trade around 146.0, 141.7 and 135.0 per dollar over the next three, six and 12 months respectively.
Sterling, which has gained over 10% since sinking to a record low of $1.0327 in September amid political turmoil, was forecast to be another 2.0% stronger at $1.17 in a year. Predictions ranged from $1.06 to $1.29.
(For other stories from the November Reuters foreign exchange poll:)
