US Dollar Might Not Keep Currency Crown Next Year: Poll

Bengaluru: The US dollar, which has had its best yearly performance since 2015 so far in 2018, will hold on to those gains for the rest of the year but beyond that is unlikely to maintain its ascendancy, a Reuters poll showed. A majority of foreign exchange strategists in Reuters polls since the dollar's resurgence in April had predicted a reversal in its fortunes, with the upward trend not expected to last more than three months. But the current rally has outlasted those expectations. Still, the latest poll of over 50 strategists taken August 31- September 5 showed the dollar, up over 3 per cent this year, would reverse that trend with most currencies - including battered emerging market currencies - forecast to gain in a year's time.

That thinking is driven by expectations that US economic growth momentum has peaked as well as the fact that many of the things underpinning the dollar - ranging from expected Federal Reserve interest rate hikes to the US-China trade dispute - have now been priced in.

"The substantial US dollar rally was not widely expected, even within the context of looking over the past long-term downtrend in the dollar against major currencies. It has definitely gone on for long and has been a surprise based on the length and magnitude of this corrective bounce in the dollar," said Nick Bennenbroek, head of FX strategy at Wells Fargo.

"But over time, once the fiscal stimulus eventually fades ... we do expect the dollar to soften over time and there are indications that it might be getting closer to the end."

While there has been no let-up in the trade wrangling between the United States and China, with President Donald Trump set to ramp up tariffs on more Chinese imports, the dollar's performance over the past month has been mixed.

Currency speculators reduced bets in favor of the US currency in the latest week for the first time in 11 weeks, after net long dollar positions hit a more 1-1/2-year high the previous week.

Still, the latest poll showed the US currency is not likely to fall in the near-term. Indeed, the median probability of a dollar correction of 5 per cent or more by year-end was only 20 per cent, according to responses to an additional question.

"The dollar is overvalued and the Fed isn't doing anything to send it higher, but that's enough for it to remain top dog in currency markets in the absence of good news elsewhere," noted Kit Juckes, global head of FX strategy at Societe Generale.

"The 'winner' is the currency that doesn't lose. And right now, that's still the dollar. There's not much to make me think the dollar should be going up, but there's plenty to make me nervous about other currencies."

In a year's time, though, the euro, which is down more than 3 per cent against the dollar this year, is forecast to gain 4 per cent to $1.21 from around $1.16 on Wednesday.

Sterling will gain around 6 per cent against the dollar in a year, but expectations for that rise are conditional upon Britain leaving the European Union with a deal, which is not certain. 

The Japanese yen, which is also considered a safe bet during times of economic distress, is forecast to gain over 2 per cent against the dollar in a year.

"USD remains supported across the board due to market fears about a US-led global trade war, a booming US economy and continuing Fed policy normalisation – all of which underscore the appeal of the currency," noted strategists at CA-CIB.

"Over the long term, we anticipate renewed USD under performance on the back of a flatter US Treasury yield curve, concerns about the US's deteriorating twin deficits and the diminishing positive growth impact from President Trump's fiscal stimulus."