Greenback strength to persist on delayed Fed rate cut calls By Reuters

Written by Sarobiya Ganguly

BENGALURU (Reuters) – The US dollar's rise will remain steady and may trade more strongly than expected in the coming months if policies from the Federal Reserve and other major central banks diverge, according to forex strategists polled by Reuters.

The dollar has recovered from the lull it witnessed in late 2023, strongly ignoring expectations of strategists in Reuters polls over the past year for a weaker dollar, and has already risen 4.3% this year against a basket of major currencies.

It is also more likely to trade higher than expected rather than lower over the next three months, according to a nearly 75% majority of forex strategists, 42 out of 58, in a Reuters poll conducted from April 29 to May 2.

“We remain steadfast in our belief that the strong dollar will continue,” said Paul McKell, global head of foreign exchange. “The strong US economy, shown in activity numbers and steady inflation, will make it difficult for the Fed to start cutting interest rates.” Research at HSBC Bank.

“As a result… the dollar will remain in the lead against other major currencies in the coming months,” he added.

Federal Reserve Chairman Jerome Powell said Wednesday after the central bank's latest meeting that policymakers “will take longer than previously expected” to gain enough confidence in inflation falling to the 2% target, reinforcing comments he made in a recent speech.

Financial markets now expect a 56% chance of a first rate cut of at least 25 basis points in September, but a 68% higher chance of a cut in November, according to the CME FedWatch tool, in line with economists' expectations in a separate Reuters poll before… Two weeks, down from six expected in January.

This would lead to a significant policy divergence between the world's major central banks, which may begin cutting interest rates at different times after raising interest rates in tandem to levels not seen in several decades to address hyperinflation.

The European Central Bank and the Bank of England are expected to cut interest rates earlier than the Fed, in June and August respectively, according to two separate Reuters polls.

The average forecast from 80 currency strategists in the poll was for the euro to remain at its current level of $1.07 until the end of July and then rise slightly to $1.08 in six months, down from the $1.10 expected in last month's poll and the weakest forecast in Reuters polls to date. this year.

“We are really surprised at how inflation has developed (in the US) – I would expect it to be at least 0.2% lower so far,” said Steve Englander, head of G10 foreign exchange research at Standard Chartered. :).

“The pullback on Fed rate cut expectations has made a real difference – the (current) episode of dollar strength appears to be having a bigger impact,” he added.

The Japanese yen has fallen about 10% this year and hit a 34-year low at US$160.03 earlier this week, recovering some of its losses due to suspected interference from Japanese authorities.

The survey showed that the coin would rise only slightly to US$152 by the end of July, but would then be one of the biggest gainers among major currencies and rise about 8% to US$143.67 in 12 months.

However, the currency was more likely to trade weaker than expected rather than stronger in three months, according to 13 of 18 participants who answered an additional question.

“With US yields trending higher and the dollar strengthening, what the BOJ is really trying to do is buy time to slow the pace of (recent) weakness until fundamentals start moving in favor of a higher yen,” Hardman told me. Senior currency analyst at MUFG.

(For other stories from the Reuters May Foreign Exchange Survey:)