Lack of alternatives set to drive dollar dominance

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BENGALURU — The dollar will retain most of its recent gains for at least another six months, according to a Reuters poll of FX strategists who for years mostly held the view the greenback would weaken.

Last trading just below a 20-year high it hit last week, the dollar index is up over 14.0% since the start of last year, with about half of those struck this year alone.

That rally shows few signs of abating as the Federal Reserve just delivered a much-anticipated 50 basis point rate hike and left the door open for several such moves in coming months to tame the highest inflation in four decades.

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“While it is true that a lot of monetary tightening has been priced into the dollar, which would normally suggest more limited upside room…at the same time, we think that we definitely wouldn’t exclude more hawkish repricing in terms of the terminal rate, for example, towards the 4.0% mark,” said Francesco Pesole, FX strategist at ING.

“We think that the dollar strength induced by Fed tightening will last as long as the Fed doesn’t start pushing back against market pricing in terms of (the) terminal rate.”

The Fed funds rate, now at 0.75%-1.00%, has far to go based on that analysis.

Expectations for the most aggressive monetary tightening in decades have roiled global financial markets, sending the benchmark S&P 500 down over 10.0% for the year and U.S. Treasury yields to three-year highs near 3.0%.

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While higher Treasury yields were expected to keep the dollar well-bid in the near term, the May 2-4 poll of nearly 70 strategists taken just before the Fed meeting showed analysts still expected the dollar to weaken over the next 12 months.

“Front-loaded monetary tightening will have consequences for growth which will result in rate hike expectations later being pared, leading to a weaker dollar,” noted Lee Hardman, currency analyst at MUFG.

Down about 7.0% for the year, the euro lost about 5.0% in April – its worst monthly performance in over seven years. It was not expected to recoup the majority of its year-to-date losses in 2022.

Even so, the euro was not expected to reach parity with the dollar.

A near 60% majority of analysts, 16 of 28, who answered an additional question said the chances the currency will reach parity versus the dollar over the coming three months was low to very low. The remaining 12 said high to very high.

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The median forecasts showed the common currency would strengthen to $1.07 and $1.09 in the next three and six months, a gain of 1.4% and 3.3% respectively. It traded around $1.055 on Wednesday.

It was then forecast to reach $1.13 in a year, the level at which the euro started the year.

The Japanese yen is down over 11.0% against the dollar this year and touched a two-decade low during its latest downward spiral. It was expected to recover only half of those losses to trade around 123 per dollar in the next 12 months.

When asked what was the weakest the currency will fall to this month, 16 analysts who answered the extra question returned a median of 133, over 2.0% lower than where the yen was last trading on Wednesday. Forecasts were in 130-136 range.

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Even against the backdrop of the Russia-Ukraine war, the yen was the worst performer among G10 currencies this year, raising questions over its credentials of a safe-haven currency.

Asked if the recent breakdown in its safe-haven status was temporary, a strong majority of analysts, 14 of 21, said yes.

“It has lost some attractiveness as a safe-haven currency, but I wouldn’t say this is a complete shift that will last for four years. I think there a lot of temporary factors that are at play at the moment,” added ING’s Pesole.

(For other stories from the May Reuters foreign exchange poll:) (Reporting by Hari Kishan; Polling by Sarupya Ganguly and Anant Chandak; Editing by Ross Finley and Barbara Lewis)