Big move for US dollar not a given in the next three months

THE US dollar’s recent comeback may not be indicative of a new broad trend, with forex strategists in a Reuters poll split on the greenback’s path in the next few months, suggesting volatility will dominate currency markets in the short run.

The US dollar clawed back January’s losses after higher-than-expected US non-farm job gains data last Friday (Feb 3) raised doubts over market expectations that the Federal Reserve would loosen monetary policy by the end of this year.

Citing the jobs data, Atlanta Federal Reserve Bank president Raphael Bostic said on Monday that the central bank could need to lift borrowing costs higher than previously anticipated.

Interest-rate futures pricing shows that markets are expecting the federal funds rate to peak just above 5.1 per cent by July. This is close to the central bank’s estimates, and higher than the under 5 per cent figure expected prior to Friday’s report.

This repricing is likely to keep volatility elevated in the near term. The JP Morgan VXY G7 Index is already above its 10-year average.

Jane Foley, head of forex strategy at Rabobank, said: “I think the market’s going to be quite fickle, and this whole process of the market’s view coming in line with the Fed’s view won’t be overnight.” She added that it would be a “process”, and that “we’re going to see some volatility”.

There was no clear majority among analysts polled by Reuters on what the greater risk was to the US dollar over the coming three months. While 12 said it was if the greenback were to decline at a faster speed, 11 said it was if it declined at a slower speed. The remaining 19 said the US dollar rising was the greater risk.

UBS Global Wealth Management senior economist Brian Rose said: “In the shorter run, there’s some chance for the US dollar to gain a bit... especially if the data stays relatively good, and the Fed gets in at least two more hikes, and there is some upside risk to the terminal rate for the Fed.”

However, the consensus view in a poll of 66 forex strategists predicted that the US dollar would weaken over the next 12 months.

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The euro rose 1.5 per cent against the greenback last month, its best start to the year since 2018. It has since given up all of those gains, but the strategists forecast that it would strengthen from its current level to trade around US$1.08, US$1.09 and US$1.11 in the next three, six and 12 months, respectively. That year-end prediction is around 3.5 per cent higher than the US$1.07 it was trading at on Tuesday.

Meanwhile, the Japanese yen is down over 12 per cent last year, in its worst performance in nine years. The strategists expected it to change hands for around 124 per US dollar in a year’s time. If realised, that would be a gain of around 6.5 per cent against the US dollar.

Median forecasts also showed the British pound strengthening from US$1.20 to US$1.24 in the next 12 months.

But much still depends on the outlook for the US dollar.

Brian Daingerfield, head of G10 currency strategy at NatWest Markets, said: “We continue to expect the US dollar to weaken; a number of factors sort of underpin that view. We do think the US economy is likely to continue to slow, but the most recent data we got on Friday certainly pushes us back against that hypothesis.

“We also think inflation pressure is likely to continue to moderate as we go through the year, and so we’re seeing less upside risk to the federal funds rate or the path of the federal funds rate as an upside risk to the US dollar.” REUTERS