By Indradeep Ghosh and Shaloo Srivastava
BENGALURU (Reuters) – The U.S. dollar will hold its ground against most major currencies for the rest of the year despite expectations that interest rate differentials will narrow as the U.S. economy remains resilient, according to FX strategists polled by Reuters.
Although the greenback is still down 0.5% against major currencies this year, it has gained nearly 1.3% in the past week, as calls for a rate cut by the federal funds rate and expectations of a US recession this year withered.
Several US Federal Reserve officials, including chairman Jerome Powell, have argued in favor of at least two rate hikes, and against market expectations, one that has helped strengthen the currency.
According to a June 30-July 5 survey of 80 FX strategists, the dollar won’t relinquish those recent gains anytime soon, even though some major central banks, such as the European Central Bank and the Bank of England, plan to raise rates in the long term.
„A tightening of the US labor market could help the economy and the dollar in the short term,” said Kit Jucks, chief FX strategist at Societe Generale. „Even if we see (interest) rates rise, a new big euro rally is unlikely to start without strong growth.”
In fact, most common contributors showed the dollar’s outlook against most major currencies for the coming six months either improved or held unchanged from a month ago.
Meanwhile, net U.S. dollar short positions eased to a two-year low in May, according to data from the Commodity Futures Trading Commission.
The latest data showed the world’s largest economy was stronger than expected and outperformed the euro zone, which slipped into recession earlier this year.
„We see room for a dollar rebound in the near term. The U.S. economy is in better shape than Europe and Asia, which suggests it is 'more credible over the long term’ from the Fed than others,” said Jonas Golderman, deputy chief market economist at Capital Economics.
The euro, now at $1.09 after rising more than 2% in June, was expected to trade at $1.10, down less than 1% in six months.
Sterling, one of the best-performing G10 currencies this year, is forecast to change hands at $1.26, slightly lower than the current $1.27.
The double whammy of high interest rates and sticky inflation has already dragged down economic activity in Britain.
When asked how the dollar would fare against major currencies over the next three months, 45% of strategists, 27 out of 60, said it would range and 19 would strengthen. Only 14 people said it would be debilitating.
„The dollar is getting a tailwind from the Fed … the current strength lies in the central bank’s (rate) overestimation,” said John Hardy, head of FX strategy at Saxo Bank.
„But at the same time, we have a very strong global risk perception and liquidity and financial conditions are very easy. It’s generally associated with dollar weakness. Those two things balance each other out.
(Reporting by Indradeep Ghosh and Shaloo Srivastava in Bengaluru; Polling by Sarupya Ganguly, Anita Sunil and Veronica Kongvir; Editing by Hari Kishan, Ross Finlay and Matthew Lewis)
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