Cracks widen in US dollar strength as economy slows: Reuters poll

BENGALURU, Nov 8 (Reuters) – A majority of FX strategists in a Reuters poll said the dollar’s recent weakness would last through the year. 2023.

Treasury yields gave the dollar an unshakeable edge over its peers as a stronger-than-expected U.S. economy and the Federal Reserve raised interest rates to curb high inflation.

But renewed expectations of the Fed’s rate hikes hurt the dollar, with the currency losing nearly 2.0% from last month’s peak and lifting the dollar index (.DXY) up 2% for the year.

Suggesting that the current dollar weakening trend should go further, two-thirds of analysts, 28 out of 45, who responded to a separate question, said the dollar is likely to trade below current levels against major currencies by the end of the year.

They also expect it to slip against the euro and other G10 currencies over the next 12 months, a position analysts have held all year but have been proven wrong each time. Some are more confident that they will be right this time.

„The dollar and U.S. yields have had a strong rally over the (past) two to three months … but it looks like we’ve reached a point where yields and the dollar have peaked,” said senior currency analyst Lee Hartman. Analyst at MUFG.

„Yields will be hard to hit new highs this year because markets are now more confident that Fed hiking is over, speculation is already starting to intensify again, and next year could see Fed policy change with speculative growth. More aggressive Fed rate cuts next year.”

When asked what will be the primary influence on major currencies later in the year, a slim majority of analysts, 26 out of 49, said economic data. Another 20 cited interest rate differentials, and three cited the need for safe havens.

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The latest employment data suggests cracks are finally appearing in the world’s largest economy’s astonishing resilience to rate hikes over the past year and a half. But the US economy is still outperforming its peers.

The latest data from the Commodity Futures Trading Commission showed that currency speculators are still net bullish on the US dollar.

„At the moment, we’re still tactically long the dollar and we think it should run through the end of the year, primarily against currencies that are showing weak fundamentals. EUR/USD is the prime case,” he said. Simon Harvey, Head of FX Analysis at Monex Europe

The euro zone economy shrank by 0.1% last quarter, expected to avoid a recession. The euro is forecast to gain around 4.0% over the next 12-months after recouping all of its losses for the year.

The average forecast of 72 forex strategists showed the common currency trading at $1.07, $1.08 and $1.11 over the next three, six and 12 months. Those estimates haven’t changed broadly since the October survey.

The Japanese yen, the year’s worst-performing major currency, is expected to remain under pressure in the near term.

The 20 analysts who responded to a separate question asking what weakness the yen could trade against the dollar by the end of the year returned an average of 152/dollar.

However, the currency, which has lost a third of its value since 2021, including 13% this year alone, is expected to recoup most of its 2023 losses over the next 12 months.

The poll shows that the yen could change hands at 136/dollar in a year’s time, 10% higher.

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Sterling, already up 1.5% in 2023, is forecast to rise 3.5% to $1.27 a year.

Emerging market currencies are expected to pick up well next year to post significant gains against a retreating US dollar.

(For other stories from the November Reuters Foreign Exchange Survey:)

Reported by Hari Kishan; Voting by Sarubya Ganguly, Brujith Arun, Devyani Satyan and Anant Chandak; Editing by Ross Finlay and Mark Potter

Our Standards: Thomson Reuters Trust Principles.

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