(Reuters) - The U.S. dollar’s recent resurgence will last another three months, and possibly up to six, but its dominance will fade next year, a Reuters poll of currency strategists showed.
With a brightening economic backdrop outside the United States and an expected huge U.S. budget gap from aggressive tax cuts passed by Congress, Reuters foreign exchange polls had until April been forecasting the dollar to underperform in 2018.
But the greenback, which lost over 10 percent in 2017, has gained about 3 percent so far this year as major economies lost momentum. With risks of a global trade war increasing daily, investors have taken shelter in U.S. assets.
Currency speculators increased bullish bets on the dollar to the largest since mid-May last year at the end of June, according to Commodity Futures Trading Commission data released on Friday.
That run up in the dollar is predicted to continue this year as the U.S. Federal Reserve is expected to deliver interest rate hikes steadily through this year and next, according to the poll of over 70 strategists taken June 2-5.
“With (U.S. President Donald) Trump and the Fed forging ahead with their domestic agendas, expect the dollar to stay supported and the risk environment to stay fragile,” noted Chris Turner, global head of strategy at ING.
Just last month, nearly 60 percent, or 35 of 60 analysts said the dollar’s recent dominance would only last about three months, including 10 respondents who expected it to end within a month.
While about 60 percent of a larger sample of nearly 70 analysts in the latest poll still expect the dollar’s recent rally to last only up to three months, there were more respondents this month than last who said the momentum will go on for another six months.
“The period of synchronized global growth underway for the past year looks to be giving way to a period of more U.S.-biased global growth. With this shift, we want to avoid being underweight U.S. dollars,” noted Mike Ryan, chief investment officer for the Americas at UBS.
With the U.S. economy sprinting ahead, the Fed made its tone slightly more hawkish at its recent meeting even as the European Central Bank made clear interest rates will not rise in the euro zone until late next year.
That widening policy gap between the Fed and other major central banks is expected to be one of the main drivers of dollar strength going forward, according to a majority of analysts who answered a separate question.
“Because of the Fed’s position to stand out as the most hawkish bank within the G10, the dollar is getting that bit of extra support over and above other G10 currencies,” said Jane Foley, senior currency strategist at Rabobank.
Rising concerns about a trade war keeping the dollar well-bid as a safety bet for now, and better-than-expected U.S. economic performance were also cited as key supports for the currency.
But safe-haven bets are likely to trigger an inversion in U.S. Treasury yields within the next year or two, signaling more trouble ahead. [US/INT]
“If the global trade wars intensify and there is a spike in global risk aversion, the USD could benefit at the expense of the emerging market and high-beta currencies, but the FX majors could even outperform the USD if the conflict between China and the U.S. intensifies,” BBVA strategist Roberto Cobo Garcia said.
In line with that, the greenback was forecast to lose its allure beyond 2018 and instead expectations of other central banks’ policy paths, which are likely to become clearer, would dictate currency moves more next year.
That was evident in predictions for the euro.
The euro EUR=, which has fallen out of favor in recent months, is down close to 3 percent this year, the currency's worst half-yearly performance since 2015.
The single currency is forecast to recoup much of those loses against the dollar by the end of this year, however, and be up over 4 percent in 12 months.
The euro was forecast at $1.19 in six months, almost a 2 percent gain from around $1.17 it was trading at on Thursday. It was forecast to rise to $1.22 in a year.
Sterling, which has taken a pounding in recent weeks, will move little in the run up to Britain’s departure from the European Union next year and then gain ground on the U.S. dollar post-Brexit. [GBP/POLL]
Polling by Mumal Rathore, Manjul Paul and Sujith Pai; Editing by Catherine Evans