BENGALURU Reuters - The dollar's performance against major currencies will be mixed as investors are expected to favour those carrying higher interest rates in both the short and medium-term, a Reuters poll of FX strategists found.
The inflation in the United States and other countries has led to the increase in rate increase expectations as the dollar has been at odds with central banks' own projections, which have caused money markets to bring forward rate increase expectations.
These expectations have pushed yields on the U.S. Treasuries and other federal debt to the highest in more than a year, especially at the shorter end of the curve. That is going to continue.
While the dollar gains are so far this year, rising Treasury yields have helped it maintain its gains, rate increase speculation other parts of the world looks to restrain the dollar from strengthening any further.
The market is taking a pretty strong stance on what central banks plan to do, according to a lot of places. They're not listening to central banks like the market thinks it is going to do what central banks are going to do, said John Hardy, head of FX strategy at Saxo Bank.
In the near term, I expect the dollar to end the quarter approximately flat, but weaken next year. The poll of 70 foreign exchange analysts showed that nearly all major currencies trading higher than current levels in the next 12 months, a view the analysts have held for years even as the dollar dropped higher.
The currencies offering higher interest rates were expected to surpass the rest.
The British pound, the New Zealand dollar and the Canadian dollar were expected to gain 2,9%, 1.6% and 2% respectively. All of their central banks are going to take rates higher next year. That was not enough to make any significant dent in the dollar's strength. The euro and the Japanese yen were not forecast to claw back their year to date loss of 5% and 9% over the next 12 months, according to their nearest rivals, the euro and the Japanese yen.
According to the poll, the dollar is likely to hold up to a significant chunk of 2021's near 4.5% gain for another year.
The dollar can strengthen even further, according to analysts.
We think the dollar will gain further as we are looking for broad dollar strength. Brian Rose, the senior economist at UBS Global Wealth Management, said that the Fed is moving towards tapering that should bring support to the dollar.
The most vulnerable are those currencies where there's no prospect for rate hikes. The currency where central banks are hiking? We still think the dollar will gain widely. Since most major central banks and many analysts are still watching the current jump in price rising as unemployment rates still below pre-pandemic levels, there was a moderation in interest rate pricing.
There is a chance that interest rates went up as quickly as the market is expecting, and we could be going for a recession in many countries, said Jane Foley, head of the FX strategy at Rabobank.