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BENGALURU (Reuters) – Most FX strategists in a Reuters poll predict that the recent weakness of the dollar will continue for the rest of the year. They also believe that economic data will be the primary influencer of major currencies throughout 2023.
The dollar gained a significant advantage over other currencies due to a stronger-than-expected US economy and rising Treasury yields resulting from the Federal Reserve’s interest rate hikes to control high inflation.
However, the expectations of a rate hike by the Fed have put the dollar at a disadvantage. As a result, the currency has declined by about 2.0% from its peak last month, causing the dollar index to rise by approximately 2% for the year.
Of the 45 analysts who participated in the survey, 28 suggested that the current trend of dollar weakening will continue, with nearly two-thirds of the analysts predicting that the dollar will remain at current levels against major currencies by the end of the year.
They also anticipate that the dollar will slip against the euro and other G10 currencies over the next 12 months, a view that analysts have held all year but which has been proven wrong each time. However, some analysts express greater confidence this time that they will be proven right.
“Over the past two to three months, the dollar and US yields have been on a strong upward trend… but it appears that we have reached a point where yields and the dollar have peaked,” said Lee Hardman, a senior currency analyst at MUFG.
“It is becoming increasingly challenging to push yields to new highs this year as market participants are now more confident in the likelihood of a Fed rate hike. This has raised speculation that we could see a policy change from the Fed next year and has intensified speculation about more aggressive rate cuts,” added Hardman.
When asked about the primary factors impacting major currencies for the remainder of the year, a slight majority of analysts (26 out of 49) pointed to economic data, while 20 mentioned interest rate differentials and three cited safe-haven demand.
Recent employment data indicates that the largest economy in the world, which has shown remarkable resilience to rate hikes in the past year and a half, is finally starting to exhibit weaknesses. Nevertheless, the US economy continues to outperform its peers.
The most recent data from the Commodity Futures Trading Commission reveals that currency speculators still hold significant net-long positions on the US dollar, indicating strong support for the greenback.
“Currently, we still maintain a long position on the dollar from a strategic standpoint, and we believe this will continue until the end of the year, particularly against currencies that continue to exhibit weak fundamentals. The EUR/USD is a primary case in point,” said Simon Harvey, Head of FX Analysis at Monex Europe.
The euro zone economy contracted by 0.1% in the last quarter and is expected to experience slower growth this quarter, narrowly avoiding a recession. The euro, which has recovered all its losses for the year, is projected to increase by approximately 4.0% over the next 12 months.
The average predictions of 72 forex strategists indicate that the common currency will trade at $1.07, $1.08, and $1.11 over the next three, six, and 12 months, respectively. These estimates remain largely unchanged from the October survey.
In the near term, the Japanese yen, the worst-performing major currency this year, is expected to face ongoing pressure.
When asked about the weakest level of the yen against the dollar by the end of the year, 20 analysts responded with an average of 152/dollar.
However, despite having lost nearly a third of its value since 2021, including a 13% decline this year alone, the currency is projected to recover most of its losses in 2023 over the next 12 months.
The survey showed that the yen is anticipated to appreciate by over 10% to 136/dollar within a year.
Sterling, which has already gained about 1.5% in 2023, is forecast to increase by 3.5% to $1.27 within a year.
Emerging market currencies are expected to remain resilient over the next year and register significant gains against the weakening US dollar.
(For other stories from the November Reuters Forex Survey:)
(Reporting by Hari Kishan; Polling by Sarupya Ganguly, Purujit Arun, Devyani Satyan, and Anant Chandak; Editing by Ross Finlay and Mark Potter)