By Hari Kishan and Shrutee Sarkar
BENGALURU (Reuters) - The U.S. dollar will reign supreme for at least another 3-6 months, a Reuters poll of strategists found, saying it will take a significant change in market expectations for Federal Reserve rate hikes to push it higher.
Indeed, while the dollar was not expected to make any significant headway from current levels, it was forecast to hold onto most of its impressive gains from 2021, according to the Jan. 31-Feb. 2 Reuters poll.
Multi-decade high inflation in the United States and swathes of the rest of the world has prompted the Fed and other central banks to dial back some of the stimulus measures enacted during the COVID-19 pandemic.
That sudden change in policy expectations sent equity prices into a tailspin last month, with the benchmark S&P 500 index marking its worst start to the year since the financial crisis.
U.S. Treasuries have also taken a pasting, with yields rising by some measures at their fastest pace since 2009 in January as traders bet on a quicker pace of Fed tightening.
That is fertile ground for the dollar to consolidate its strong position. The dollar index rose nearly 7% in 2021, its best performance since 2015, but is up just 0.2% this year so far.
"Over the short term, we think the dollar is going to be more supported by the fact markets are still adjusting to this more hawkish U.S. rate profile. That's going to give the dollar some strength," said Simon Harvey, head of FX analysis at Monex Europe, the most accurate forecaster for major currencies in Reuters polls for 2021 according to Refinitiv Starmine.
(Reuters poll graphic on FX majors forecasts: https://fingfx.thomsonreuters.com/gfx/polling/zjvqkawbovx/Reuters%20Poll-%20Dollar's%20dominance.png)
Over 75% of respondents to an additional question, 33 of 43, said the dollar's dominance would last at least another 3-6 months. Among those, 14 said that specific time period, 11 said 6-12 months and eight said more than a year.
Among the remaining 10, eight picked less than three months and only two said it was already over.
EURO GAINS
Asked how many additional basis points of Fed tightening need to be priced in for this year for the dollar to trade significantly higher, 24 analysts returned a median of 62.5 basis points. That was on top of the roughly 125 basis points currently priced in for the year.
Predictions ranged from 25 basis points to 200.
Fed officials played down the chance of a half point rate hike in March on Wednesday, knocking the dollar index off its recent 19-month high of 97.441.
That broadly has cast doubts over whether the Fed could tighten policy to the extent financial markets were pricing in.
Federal funds futures imply U.S. interest rates will peak at just 1.75%-2.0% in the current cycle. That was lower than the 2.25%-2.50% economists predicted in a separate Reuters poll last month.
"I think there are warning signs out there about the medium term dollar outlook," said Jane Foley, head of FX strategy at Rabobank.
"What really worries me is that flattening of the yield curve ... I think the market is saying the Fed is walking a very narrow path, and if it hikes too much this is going to be a very short interest rate hiking cycle and we could have potentially a hard landing on the other side."
The euro was forecast to erase some of its losses for the year and gain over 1.5% over the next 12 months. Those gains would still fall short of recouping an almost 7% loss against the dollar last year.
The Japanese yen, which has benefited from the flare-up in geopolitical tensions and the ensuing flight to safety, was up 0.75% for the year but was expected to give up those gains and drift down 1.5% in a year.
"We're expecting the dollar to be resilient against low-yielding currencies where monetary policy is a lot slower to react," added Harvey from Monex Europe.