All Roads Lead to Strong U.S. Dollar: FX Strategists

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

Backed by a strong US economy that continues to create jobs at a pace that exceeds consensus, the Federal Reserve has stepped up its fight against inflation by raising interest rates much faster than most of its peers. That has helped the dollar to one of its best results in at least a decade.

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

With most outcomes such as higher interest rate spreads and safe-haven moves expected to favor the dollar, the currency is likely to stay strong longer.

“The dollar between now and at least the end of the year will continue to be stronger across the board,” said Roberto Mialich, currency strategist at UniCredit.

“At the current juncture, the Fed focusing more on economic growth than inflation is probably the only reason the dollar could reverse its current trend…plus, the dollar could also benefit from its safe-haven status.” sure”.

But beyond 2022, the dollar was expected to give up some of those year-to-date gains, the September 1-6 Reuters survey of 70 currency strategists showed.

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

While the dollar has dominated almost all currencies followed by analysts and traders, it has performed particularly well against the euro, Japanese yen and sterling.

All three currencies have hit multi-decade lows or came close to doing so.

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

It was expected to trade below parity for the next three months, suggesting that the European Central Bank’s 75 basis point rate hike scheduled for its meeting on Thursday would do little to reverse the euro’s fortunes. [ECILT/EU]

The common currency is 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 not be enough to offset the 13% drop for the year.

Those median forecasts for horizons of one, three and six months were the lowest in nearly two decades.

“If the ECB goes for 50 bps, we would be concerned that the markets would see them as not committed enough to fighting inflation… In our view, a 75 bps hike is not an anticipated burden, but a long-awaited recovery.” for a long time.” 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. EUR needs strong statements from (ECB President Christine) Lagarde that the ECB will do what it takes.” to reduce inflation to the lowest level”. objective.”

The Japanese yen, down about a fifth and the worst performer among majors this year, was expected to recover about half of those losses to trade at 127.0 per dollar within a year. The last time it was traded it was around 142 against the dollar.

The struggling British currency will not recoup its losses against the US dollar anytime soon as sharp interest rate hikes from the Bank of England fail to offset an expected recession and rising government spending. [GBP/POLL]

Sterling, down 15% this year, was expected to hover around $1.16 where it was trading on Tuesday one to three months from now.

In six months the pound will have risen to $1.18 and in a year to $1.23, the survey found, still well below $1.35 as of 2022.

(For other stories from the September Reuters foreign exchange survey:)

(Reporting by Hari Kishan; additional reporting and analysis by Indradip Ghosh; survey by Aditi Verma, Milounee Purohit, and Susobhan Sarkar; editing by Ross Finley and Jonathan Oatis)

Copyright 2022 Thomson Reuters.

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