BENGALURU, Nov. 3 (Reuters) – The dollar’s performance against major currencies will be mixed as investors should favor those that carry higher interest rates in the short to medium term, according to a Reuters poll of FX strategists.
Calls for tight monetary policy to control inflation reaching multi-year highs in the United States and elsewhere have prompted money markets to anticipate rate hikes and are now at odds with central banks’ own projections.
These expectations pushed yields on US Treasuries and other sovereign debt higher, especially at the shorter end of the curve, to their highest for more than a year. It should continue.
But while rising Treasury yields have helped the dollar hold its gains so far this year, speculation about rate hikes elsewhere should prevent the greenback from strengthening further.
“The market takes a pretty strong stance in a lot of places on what central banks plan to do. They hardly listen to central banks… it’s like the market thinks it knows what central banks are going to do,” said John Hardy, head of currency strategy at Saxo Bank.
“In the very near term, I expect the dollar to end the quarter roughly flat, in broad terms, but weaken next year.”
October 29-Nov. 2 poll of nearly 70 forex analysts showed that nearly all major currencies were trading above current levels over the next 12 months – a view these analysts have been championing for years, even as the dollar has derivative on the rise.
Among them, currencies offering higher interest rates should outperform the others.
The British pound, New Zealand dollar and Canadian dollar are expected to gain 2.9%, 1.6% and 2% respectively. All of their respective central banks are set to hike rates next year. ECILT / FR /
However, this was not enough to significantly reduce the strength of the dollar. Its closest rivals, the euro and Japanese yen, are not expected to recoup their annual losses of 5% and 9% over the next 12 months.
The greenback (.DXY) was likely to retain a significant share of the nearly 4.5% gain of 2021 for another year, according to the poll.
But some analysts say the dollar may strengthen further.
“We are looking for an overall strength in the dollar, we think the dollar will gain further. With the Fed heading for a decrease, this should give support to the dollar,” said Brian Rose, senior economist at UBS Global Wealth Management.
“Those currencies for which there is no prospect of a rate hike are the most vulnerable. The currencies in which central banks are rising? These currencies will hold up better. But we still believe the dollar will gain broadly.”
But with most of the major central banks and many analysts still viewing the current price hike as temporary and unemployment rates still below pre-pandemic levels, some moderation in interest rate pricing was likely.
“The reality is that if interest rates rose as quickly as the market anticipated… we could be heading into recession in many countries,” said Jane Foley, head of currency strategy at Rabobank.
(For other articles from the November Reuters currency poll: read more)
Reporting by Hari Kishan; Poll by Vijaylakshmi Srinivasan, Sarupya Ganguly and Arsh Mogre; Editing by Ross Finley and Steve Orlofsky
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