The recent decline in the U.S. dollar seems to be temporary, as certain speculators have already scaled back expectations for significant interest rate cuts by the Federal Reserve this year. This insight comes from a Reuters survey of strategists who, despite acknowledging the short-lived nature of the current slide, still predict a weaker dollar a year from now.
Anticipation of the Fed initiating policy easing as early as March was tempered after the release of minutes from December’s policy meeting. These minutes revealed a consensus among most policymakers that borrowing costs should remain elevated for an extended period, indicating a reduced likelihood of a rate cut in March.
Subsequent to the release, the U.S. dollar strengthened against a basket of currencies, registering a 1% increase for the year after experiencing a 5% decline in the preceding two months.
As of Wednesday, interest rate futures were indicating an approximately 66% probability of the Federal Reserve implementing rate cuts in March, down from the 87% figure recorded a week earlier, according to CME FedWatch. Further reduction in speculative bets is expected to provide an advantage to the currency in the short term.
“In the short run, we think the dollar could gain a bit, mainly because we think the market is being too aggressive at pricing in Fed rate cuts…our base case is the Fed will wait until May before cutting”, said Brian Rose, senior economist at UBS Global Wealth Management.
“We have seen the dollar rebounding a bit in recent days and the dollar could be stable or maybe a bit higher in the near term”.
While acknowledging the U.S. dollar hasn’t been definitively dethroned, a majority of analysts, 36 out of 59, expressed that the primary risk to their three-month forecast is the possibility of the dollar trading stronger against major currencies than currently anticipated. The remaining 23 analysts identified the risk as the potential for the dollar to trade weaker. However, the consensus among most analysts is that the dollar will gradually weaken against major currencies over the next 12 months, driven by the Federal Reserve’s projected three interest rate cuts by year-end.
Looking beyond the immediate term, analysts, like Francesco Pesole, FX strategist at ING, anticipate a further decline in the dollar throughout the year. This expectation is rooted in the deterioration of the economic outlook, prompting a significant number of Fed rate cuts. Although a decline is anticipated, analysts suggest that the depreciation in the first half of the year will be relatively moderate compared to the previous couple of months.
In terms of specific currencies, the euro, having experienced a 3% gain last year-its first yearly increase since 2020-is predicted to capitalize on narrowing interest rate differentials. Analysts forecast a more than 2% rise for the euro, reaching around $1.12 in the next 12 months, compared to its current value of $1.09.
Among other major currencies, the Japanese yen, which has depreciated by about 30% over the past three years, is expected to strengthen by 6.6%, reaching around 135 yen per dollar in a year. Sterling, which demonstrated a robust performance last year with a gain of over 5.0%, is predicted to rise by over 1.5% to $1.29 by year-end. Additionally, the Australian and New Zealand dollars are expected to strengthen by around 4% and 2.2%, respectively.
According to Reuters.
By. Pham Thanh Bien
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