Big move for the dollar not to be taken for granted in the next three months: Reuters poll

By Hari Kishan

BENGALURU (Reuters) – The dollar’s recent comeback may not portend a new broad trend, as FX strategists in a Reuters poll shared the greenback’s course for the next few months, suggesting that volatility will dominate FX markets in the near-term.

After falling about 1.5% in January, the dollar recouped all those losses after a striking number in US nonfarm payrolls on Friday cast doubt on market expectations that the Federal Reserve would hold monetary policy until the end would relax in 2023.

Atlanta Federal Reserve Bank President Raphael Bostic said Monday, citing those stronger-than-expected job gains in January, that the central bank may have to raise borrowing costs more than previously expected.

Interest rate futures pricing shows that markets expect the fed funds rate to peak just above 5.1% by July, roughly in line with the Fed’s estimate, compared to expectations of less than 5% ahead of Friday’s jobs report .

This re-rating should keep volatility elevated in the short-term. The JP Morgan VXY G7 Index is already above its 10-year moving average.

“I think the market is going to be quite choppy and this whole process of the market view aligning with the Fed’s view is not going to happen overnight…this is a process and I think we’re going to see some volatility.” said Jane Foley, head of FX strategy at Rabobank.

There was no clear majority of analysts answering an additional question about the greater risk to the dollar over the coming three months.

While 12 said the greenback was going down faster, 11 said it was going down more slowly. The remaining 19 said the rising dollar was the bigger risk.

“In the shorter term, there is some opportunity for the dollar to gain some…especially if the data stays relatively good and the Fed makes at least two more hikes and there is some upside risk to the Fed’s final rate,” said Brian Rose, Senior Economist at UBS Global Wealth Management.

However, consensus opinion in the Feb. 2-7 poll of 66 forex strategists forecast a weakening of the dollar over the next 12 months.

The euro, which is up 1.5% against the dollar over the past month, its best start to the year since 2018, has since given up all of those gains.

However, the shared currency was forecast to rise from its current levels to around $1.08, $1.09 and $1.11, respectively, over the next three, six and 12 months. This year-end forecast is about 3.5% higher than the $1.07 that traded on Tuesday.

The Japanese yen lost over 12% last year, its worst performance in nine years and was expected to change hands by 124/dollar in a year. Realized, that would be a gain of around 6.5% against the dollar.

Median forecasts also showed the British pound rising from $1.20 to $1.24 over the next 12 months.

But much still depends on the prospects for the dollar.

“We continue to expect the dollar to weaken – a number of factors support this view. We believe the US economy is likely to continue to slow, but the latest data we received on Friday certainly throws us against that hypothesis,” said Brian Daingerfield, head of G10 currency strategy at NatWest Markets.

“We also believe that inflationary pressures are likely to ease further over the course of the year and as such we see less upside risk to the Fed Funds Rate or Fed Funds Rate path as the upside risk to the dollar.”

(For other stories from Reuters February foreign exchange survey 🙂

(Reporting by Hari Kishan; Analysis by Sarupya Ganguly; Survey by Prerana Bhat and Susobhan Sarkar; Editing by Bernadette Baum)

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