Dollar still in favour, but recent losses unlikely to be recouped

[NEW YORK] The dollar will appreciate against major currencies in the coming months, a Reuters poll found, but not enough to make up for the losses incurred just before and since the Federal Reserve raised interest rates in December.

Since December, investors have rushed into the euro and the Japanese yen, considered safe havens, amid concern about slowing inflation, low oil prices and lagging economic growth in China.

That and evidence the US economy is slowing has turned the Fed, which meets next on March 15-16, more dovish and helped narrow the policy divergence between itself and global peers.

While the Fed is not likely to raise rates this month, economists expect it will do so twice more this year. Markets are more skeptical.

"2016 is not going to be another year of the dollar," said Sonja Martens, senior FX strategist at DZ Bank. "There's a lot of potential stumbling blocks. There's geo-political risks, there's political, economic risks and many of these have the potential to upset the market equilibrium at any time."

Data suggest some improvement in the world's largest economy, with further evidence of a strong labour market likely to arrive on Friday. But expectations for four increases this year are dwindling, restraining the dollar's rise.

Even so, the dollar will strengthen from here, according to median forecasts from a poll of 61 strategists taken this week, who have trimmed their euro and yen forecasts considerably from last month after both the currencies rallied in early February.

Those expectations come despite expectations the European Central Bank will expand its quantitative easing programme next week and cut its already negative deposit rate. The Bank of Japan is also expected to ease policy further sometime after June this year.

The latest trader positioning data from the Commodity Futures and Trading Commision appeared to back analysts' milder views on the dollar.

Investors were net short on the euro, net long on the yen and dollar long bets were curbed for the ninth week to a roughly 22-month low.

Not long ago, euro-dollar parity was a popular call among strategists. But not a single analyst now is calling for the euro to breach parity with the dollar in the next six months.

Trading at $1.086 on Thursday, the euro is forecast in the poll to weaken to $1.07 in three months, $1.06 in six months and drop to $1.05 in a year from now. Forecasts have been raised from a month ago.

The ECB is expected to cut the deposit rate further, charging banks more for deposits it holds overnight, to -0.4 per cent from -0.3 per cent and increase by 10 billion a month the amount it spends buying mostly sovereign bonds.

But these policy moves aren't likely to weaken the euro much, adding further credence to debates about the effectiveness of such policy action. "You don't get any lasting trends, you get overall a slightly weaker euro because the ECB is expanding (policy) and the Fed is tightening, but of course a lot of that is anticipated," DZ Bank's Martens said. "There is slightly negative euro/dollar bias but it's not as strong as, say, the beginning of last year." Investors will also be closely watching the BOJ's next move, according to analysts, even though its surprise deposit rate cut in late January had little impact on the yen, which rallied seven per cent the week after the policy was announced.

The yen, currently trading at 114.1 to the dollar, will slip to 116 in three months, 118 in six months and 120 in a year. It was trading above 120 for most of 2015.

China's yuan, the source of most market turmoil since December, is forecast to depreciate from 6.54 per dollar on Thursday to 6.70 in six months and by 3.5 per cent to 6.78 per dollar in a year.

REUTERS