Dollar’s blistering rally to extend into next year – FX analysts in Reuters poll

BENGALURU – The unstoppable dollar, which is already having a banner year, is likely to extend its dominance beyond 2022, according to a Reuters poll of foreign exchange strategists who said the currency was still some distance from an inflection point.

Up over 16 percent so far in 2022, the dollar index has already had its best year in at least five decades, with the currency exhibiting few signs of slowing anytime soon.

Underpinning the greenback’s ascendancy were the U.S. economy’s superior performance, the Federal Reserve hiking interest rates by 300 basis points this year – with more expected – and the role it plays as a safe-haven currency.

With those broad narratives supporting the dollar well into next year the greenback was likely to be well bid over the short-to-medium term.

An overwhelming majority of 85 percent of analysts, 47 of 55, in the Sept. 30-Oct. 5 Reuters poll who answered an additional question said the dollar’s broad strength against a basket of currencies hasn’t yet reached an inflection point.

When asked when it would be reached, 25 of 46 who responded said within six months and 17 said within three months. Among the remaining four analysts three said within a year and one said over a year.

“It’s definitely too early to start calling the pivot points in the dollar…in the short term we still see more dollar upside,” said Simon Harvey, head of FX analysis at Monex Europe.

“We don’t necessarily see a bigger turning point for the greenback until at least Q2 of next year when we think we will start to see potentially U.S. fundamentals turn against the Fed’s stance of restrictive policies.”

The dollar’s extended rally is bad news for most major currencies which have not only accumulated heavy losses so far this year but have also surprisingly underperformed their emerging market counterparts.

Nearly all major currencies – eight among the G10 – which were down in double digits for the year were not expected to recoup their year-to-date losses over the next 12 months, the poll showed.

The euro which was down 12 percent for the year against the dollar and has largely traded below parity since August was expected to stay there for at least another six months.

This is the first time in over two decades median forecasts in Reuters polls have predicted the common currency to trade below parity over a six-month horizon.

It was then expected to gain around 4 percent to reach $1.03 in a year from $0.991 it was trading around on Wednesday.

Japan’s yen, which hit a 24-year low of 146/dollar recently, was expected to recover some of its losses in a year.

The safe-haven currency was forecast to trade around 144.0, 140.5 and 135.0 per dollar over the next three, six and 12 months, respectively.

If realized that would amount to only about a 7 percent gain against the dollar in 12 months for a currency already down more than 20 percent for the year and the worst performer among majors.

Much of the weakness was down to the Bank of Japan sticking to its ultra-easy monetary policy when nearly every other central bank is moving in the opposite direction.

“The Bank of Japan is still not signaling any change to its ultra-accommodative monetary policy. Adopting a less-dovish monetary policy would probably have a greater, more lasting effect on the yen’s exchange rate,” noted Jimmy Jean, vice-president, chief economist and strategist at Desjardins.

Trading around $1.12 on Wednesday the latest poll showed sterling would fall to $1.09 in a month and be at $1.10 in six months. It was predicted to be around 3.6 percent stronger at $1.16 in a year.