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Foreign exchange strategists polled by Reuters anticipate that the resurgent dollar is likely to maintain its strength in the coming months. The shift in market sentiment is attributed to a reevaluation of the expected timing for a Federal Reserve interest rate cut. Despite a brief downward trend late last year, the dollar index has surged nearly 2.0% in January.
Contrary to earlier market speculation of a rate cut in March, various Federal Reserve officials have pushed back, reducing the probability to less than 20% from a peak of around 90%, according to rate futures. Factors contributing to the strengthened dollar include a robust U.S. jobs report for January, clear signals from the Federal Reserve after a recent policy meeting, and statements from Fed Chair Jerome Powell during a television interview.
The Commodity Futures Trading Commission's recent data reveals a consistent trend of currency speculators scaling back their short dollar bets for three consecutive weeks, a pattern expected to persist. In a Reuters poll conducted from Feb. 1-6, nearly 80% of foreign exchange strategists (52 out of 67) expressed the view that the greater risk over the next six months is for the dollar to trade stronger than initially predicted, while the remaining 15 suggested a greater risk of it being weaker.
Paul Mackel, Global Head of FX at HSBC, notes that the market has shifted from initially questioning the dollar's weakening to now believing in its strength, emphasizing that central banks' pace of rate cuts will influence currency performance. Despite the expectation of a strong dollar in 2023, strategists highlight that it may not be as exceptional as in 2021 and 2022.
Most strategists anticipate an uphill task for other major currencies to surpass the dollar in the short term, given expectations of slower growth in other economies and favorable rate differentials favoring the greenback. However, the median forecast among 76 surveyed strategists suggests that the dollar is expected to weaken against most major currencies in the next three, six, and 12 months.
George Saravelos, Head of FX Research at Deutsche Bank, emphasizes that the key debate is not the timing of Fed rate cuts but whether the cuts will be greater or lesser than those of other central banks globally. The median outlook for major currencies remains largely unchanged since December, with the euro expected to gain over 4.0% in the next 12 months, trading at $1.12, and the Japanese yen forecasted to strengthen more than 9.0% to 135.50/dollar.
Paraphrasing text from "Reuters" all rights reserved by the original author.
