Image: Reuters Berita 24 English - According to a Reuters poll of FX analysts, the U.S. dollar will remain strong for at least the next thre...
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| Image: Reuters |
Berita 24 English - According to a Reuters poll of FX analysts, the U.S. dollar will remain strong for at least the next three months as it benefits from expectations for aggressive Federal Reserve interest rate increases and safe-haven appeal brought on by concerns about a global recession.
A widespread dollar rebound versus almost every other currency is being aided by the recent sell-off in risk assets and the bond markets, which has reached levels unseen in the past 20 years. Analysts claim that there is now no compelling reason to anticipate a standstill.
The dollar, which was already up a sizable 7 percent last year, has risen another 12 percent this year, routinely outpacing forecasts for how long its winning run would endure.
In a different question from the July 1-6 Reuters FX poll, 37 of 48 analysts responded in favour of the trend continuing for at least another three months.
Of those, four stated at least a year, four said at least two years, 19 said three to six months, 10 said six to twelve months. Less than three months was only selected by 11 respondents.
Nevertheless, despite short-term strength, the median projection from the most recent poll of nearly 70 analysts stubbornly clings to a long-held belief that the dollar will weaken over the next 12 months, despite the euro being trading at its lowest level in 20 years.
According to Jane Foley, head of FX strategy at Rabobank, "those who think the dollar is going to fall because the market is not pricing in as many interest rate hikes from the Fed as before are ultimately forgetting that the currency is also a safe haven."
"What are you going to buy if you sell the dollar if we are, coincidentally, staring at a potential recession in the euro zone and the UK, and if global growth is falling down?"
Although the absence of alternatives is expected to maintain the dollar well-bid against almost all currencies, those with little to no interest rate support will be most acutely affected by the strength of the dollar.
In fact, this year has seen double-digit percentage losses for the euro, the Japanese yen, and the British pound because their central banks have either not raised rates or have not kept up with the Fed's vigorous policy tightening.
The policy meeting's minutes from June showed worries that rising inflation would undermine confidence in the Fed's ability to keep prices under control. This has forced the central bank to start the most severe tightening cycle in decades, which has caused the markets to crash due to worries of a recession.
The euro, which is now down more than 10% for the year, is anticipated to rise by over 8.0 percent to about $1.10 by the middle of 2023.
The median 12-month euro forecast was, however, the lowest in five years, and nine analysts anticipate parity to be reached or broken by mid-2023.
Given the difference in benchmark yields and monetary policies between Japan and the United States, the Japanese yen, which has underperformed the other major currencies this year by about 15%, is expected to remain weaker than 130 per dollar over the next six months.
Sterling has lost over 12 percent of its value versus the dollar since the beginning of the year, but analysts predict that it will recoup around half of that loss over the course of the following year as the Bank of England is certain to keep hiking interest rates.
However, a number of problems are expected to keep the currency under pressure in the short term.
As investors look for the security of dollar-denominated assets, emerging market currencies will similarly struggle to stop their declines against the dollar in the near future.
The Russian rouble and the Turkish lira were forecast to depreciate over the next three to six months, while the tightly controlled Chinese yuan, the Indian rupee, and the Malaysian ringgit were predicted to trade roughly where they are currently.
