(Corrects quote in final paragraph to remove word “not”)
By Hari Kishan and Rahul Karunakar
BENGALURU (Reuters) - The euro will hold on to most of this year’s gains over the next 12 months, according to a poll of foreign exchange strategists, who also said a further 5 percent rise in the currency would discomfit the European Central Bank.
So far this year, the single currency has gained over 13 percent against the dollar. If maintained for the rest of 2017, that would become its best annual performance since 2003.
Still, the euro is forecast to trade around where it was on Wednesday, $1.19, in a year, according to the latest poll of over 60 currency strategists, taken Sept. 4-6.
The euro’s strength is supported by solid growth in the euro zone this year, which has driven expectations the ECB will scale back its stimulus programme.
A separate Reuters poll forecast the central bank would announce a reduction in its monthly asset purchases as early as October, with the programme ending completely by the end of next year.
But a stronger currency made a slower reduction in the asset purchases more likely. A strong euro makes imports cheaper, reducing inflation - which at 1.5 percent in August remains below the central bank’s target of just under 2 percent.
An increasing number of ECB policymakers are now concerned about euro strength, three sources familiar with those discussions told Reuters late last month.
When asked what euro/dollar level could make the central bank uncomfortable, the median of over 40 respondents was around $1.25 - about five percent from Wednesday’s level. A few said it could be as high as $1.40, but others said the euro had already crossed the ECB’s comfort threshold.
“The extent of the euro gains or the pace of the euro gains has certainly taken us by surprise,” said Jane Foley, senior FX strategist at Rabobank.
“If we had a move up to $1.25 in a short period of time - maybe six months or so - then that would be difficult for the ECB. Also, when a currency is moving fast, a central bank and everyone else will worry that the trajectory will continue.”
While the latest consensus is for the euro to trade around current levels, that outlook is not very different from analysts’ predictions for the euro to weaken slightly or remain stable since the beginning of the year.
But analysts have been wrong repeatedly about the euro’s strength this year. That has pushed the consensus in the Reuters polls for the euro to be revised higher for seven months in a row now.
Even predictions for euro/dollar parity or lower have vanished in recent polls compared with the beginning of 2017, when several forecasters had penciled in parity for sometime this year.
The dollar has weakened by around 10 percent this year as expectations for tax cuts have faded.
Late last month, the U.S. currency fell to its lowest since January 2015 on worries the aftermath of tropical storm Harvey would hurt the economy and on tension in the Korean peninsula.
Currency speculators increased bets against the dollar to their highest since 2013, according to Commodity Futures Trading Commission data, even though the U.S. Federal Reserve is expected to soon start shrinking its balance sheet, now over $4 trillion.
But recent comments from Fed policymakers show a split on the outlook for inflation and how that will play out for future interest rate increases, weighing on the dollar.
The dollar index, which tracks it against a basket of six major currencies, is forecast to end the year down over 7 percent, its worst annual performance since the financial crisis.
“We have now got to a position where the market is relatively short on the dollar,” said Foley. “The market is not really anticipating with any particular vigour that the Fed would be able to hike interest rates during the remainder of this year.”
Analysis and polling by Sarmista Sen and Rahul Karunakar, editing by Larry King