Written by Sarpiya Ganguly
BENGALURU (Reuters) – The dollar will remain firm in the coming months as financial markets continue to dampen expectations for the timing and size of Federal Reserve interest rate cuts, according to a Reuters poll of foreign exchange strategists. It showed the outlook.
Bucking a temporary downward trend in late 2023, the dollar has appreciated about 3.3% against a basket of major currencies this year, with net dollar longs at the highest since September 2022, according to trader position data. It has become standard.
A strong U.S. economy and persistent inflation are forcing financial markets to reconsider their bets on the timing of the Fed’s first rate cut.
Markets currently expect a rate cut in June to be about 60% likely, but are pricing in a rate cut of about 75 basis points this year, which some policymakers consider “reasonable.” , consistent with the Fed’s own forecasts.
But this is significantly lower than the nearly 150 basis points of rate cuts that markets had expected earlier this year, suggesting that the dollar is likely to continue to dominate in the near term.
None of the major currencies are expected to recover their year-to-date losses against the dollar for at least the next three months, currency strategists said in a March 28-April 3 Reuters poll.
“Markets are gradually learning that this is not a “cut whatever you do” environment, but rather a “no need to rush to adjust” environment…This situation is at least as strong as the dollar floor. should continue to set, and inflation easing becomes more visible,” Goldman Sachs strategists said.
The euro, trading around $1.08 as of Wednesday, is expected to rise about 1.0% to $1.09 by the end of June, marking a modest 2.3% decline since the start of the year. After that, the median forecast of 90 foreign exchange analysts predicted that the currency would rise another 1.0% to $1.10 in six months.
Keep selected currency Yen
The battered Japanese yen has fallen nearly 25% since the start of 2022 and is down about 1% after the Bank of Japan raised interest rates for the first time in 17 years last month, making it one of the biggest gainers against the dollar. It was expected that this would happen. Next year’s major currencies.
The yen, currently trading at 151.7 yen to the dollar, was expected to rise about 6.1% to 143 yen by the end of September, and a further 2.9% to 139 yen over the next 12 months. The Bank of Japan is expected to raise interest rates at least once more this year.
Still, the median of about 30 respondents who responded to an additional question was that the lowest the yen would fall this month, after hitting a 34-year low last week, was 152 yen to the dollar. showed that. Responses ranged from 151.8 to 155.0.
If this happens, it could open the door to currency intervention by Japanese authorities, which recently said it may take “decisive action” against the weaker yen.
The last time it intervened was in October 2022, when the currency fell to a low of around 152 yen to the dollar.
When asked whether the yen remains the preferred funding currency for carry trades (borrowing in low-interest currencies and investing in high-yield currencies), nearly 90% of respondents (26 out of 30) said yes. .
The remaining four chose the Swiss franc.
“The Bank of Japan’s negative interest rate policy/removal of yield curve control was widely reported and was virtually fully factored into the foreign exchange market…As a result, the yen experienced a typical ‘buy on rumors, sell on facts’ type. There was a reaction,” said Alex Cohen, a currency strategist at Bank of America.
“Carry remains the main driver of the yen and should continue to be used as a funding currency. Moving from a slightly negative policy rate to a slightly positive policy rate will not change that.”
(Click here for more articles from the April Reuters Forex Survey:)
(Reporting by Sarupya Ganguly; Analysis by Pranoy Krishna, Purujit Arun; Polling by Devayani Sathyan, Vijayalakshmi Srinivasan, Rahul Dushyantbhai Trivedi; Editing by Paul Simao)
