New York: The dollar will resume its upward climb in the coming year, but extreme near-term moves in either direction are possible, driven more by US President Donald Trump’s expected fiscal stimulus than by his words, a Reuters poll found.
After mostly gaining over the past three years, the dollar hit a wall in January, marking its biggest losses in percentage terms in three decades on concerns about the Trump administration’s preference for a weak dollar and a radical policy on immigration.
In 2016, the dollar was down less than one per cent until the US election on November 8. It then reversed course to end the year over 4 per cent higher, something forex strategists polled by Reuters had not predicted before the vote.
Instead, they had said the dollar was likely to fall in the immediate aftermath if Trump were to win.
So far this year, concern over US President Donald Trump’s attitude to the dollar, global trade and security has pushed the currency down over 2 per cent, and has led to declining Treasury yields as well.
Speculators have also cut bets in favour of the dollar for the fourth straight week. Net long positions fell to their lowest since last October, according to data from the Commodity Futures Trading Commission and calculations by Reuters.
Still, the latest poll of more than 60 forex strategists, taken over the past week, showed the bias was still towards a stronger dollar over the coming year once the fog clears around the White House’s tax and spending plans.
Six of the top 10 most accurate forecasters in Reuters polls last year are still forecasting dollar gains against most major currencies.
The dollar is also expected to gain from a divergence in monetary policy between the US Federal Reserve, which is set to raise rates this year, and other major central banks, which are expected to keep rates low.
“The policy of the incoming US administration, both actual and expected, are consistent with the US dollar strength,” said Erik Nelson at Wells Fargo, the most accurate forex forecaster in Reuters polls on major currencies over the last two years.
“Fiscal easing, whether that comes in the form of increased spending or reduced taxes, is going to represent a pretty stark shift from the more austere fiscal conditions we have seen over the past couple of years. So a mix of policies — both monetary and fiscal — surely are consistent with US dollar gains.” When asked what would drive currency markets over the next couple of months, around 70 per cent of the strategists who answered the question said Trump’s policies.
Among those who chose Trump’s policies, a slim majority said his protectionist policies on trade and immigration could weigh on forex trades. The rest cited Trump’s fiscal stimulus plan to move markets.
Trump to trump Eurozone politics
Only a few strategists picked a potential upset in Eurozone national elections as the big driver of currencies. But jitters before the coming French presidential election pushed the euro to a one-week low against a broadly weaker dollar on Monday.
The latest consensus is for the single currency, which is up around 2 per cent this year, to weaken nearly 3 per cent against the dollar to $1.04 in a year from $1.07 on Tuesday.
“It is all about the USD and about President Trump’s policies,” wrote Athanasios Vamvakidis, forex strategist at Bank of America Merrill Lynch. “We continue to expect EUR/USD to weaken.
Focusing on Europe, the elections in France and Germany, and potentially early elections in Italy, suggest substantial EUR risks.” However, the proportion of strategists calling for euro/dollar parity or lower is little changed compared with last month, under one-third of the sample.
Sterling is also forecast to resume falling, having gained around 1.5 per cent this year, once Britain begins talks on leaving the European Union.
When asked which currency will gain from market uncertainty over the next three months, most respondents based out of emerging markets said the dollar would outperform.
But overall, a majority of strategists chose the Japanese yen and the Swiss franc, both usually considered a safe bet when markets are in turmoil.
After around a 3 per cent loss in 2016, the US currency fell against the yen to its lowest since late November on Tuesday, down about 4 per cent so far this year. Yen short positions also declined to their lowest since early December.
Still, forex analysts are clinging to their favoured bet — a weaker yen outlook, mostly on account of a stronger dollar view.
The Japanese currency is now forecast to weaken about 7 per cent to around 120.0 in a year from Tuesday, reversing all the gains since the beginning of last year.
