A poll of foreign exchange analysts shows that the U.S. dollar will remain strong for at least the next three months due to aggressive Federal Reserve interest rate rise expectations and safe-haven appeal stemming from global recession fears.
The recent sell-off in risk assets and bond markets is also playing into a broad dollar rally against almost every other currency, which is not seen in two decades. Analysts say there is no good reason to expect it to stall yet.
The dollar has gone up by a hefty 7% last year and has gone up another 12% this year, surpassing nearly every forecaster's expectations on how long the winning streak would last.
A three-quarters majority of analysts, 37 of 48, in a separate question from the July 1 -- 6 Reuters FX poll, expect that trend to continue for at least another three months.
Of those, 19 said to be three to six months, 10 said six to 12 months, four said at least a year and four said at least two years. Only 11 respondents said less than three months.
The median forecast of nearly 70 analysts doggedly clings to a long-held view that the dollar will weaken in the coming 12 months despite the euro trading at its weakest in two decades.
Jane Foley, head of FX strategy at Rabobank said that the dollar is going to weaken because people who say the dollar is going to weaken because the market is not pricing in as many interest rate hikes from the Fed as before are forgetting that the dollar is also a safe haven.
Foley wondered what currency people would buy if they sold the dollar when there is a potential recession on the way.
The dollar's strength will be most acutely felt by those who have little to no interest rate backing them, despite the fact that there is a lack of alternatives to keep it well-bid against nearly all currencies.
The euro, the Japanese yen, and the British pound, whose central banks have not hiked rates or failed to keep pace with the Fed's aggressive policy tightening, have weakened by double-digit percentages this year.
According to the median, the euro is expected to gain nearly 8.0% by mid- 2023 to around $1.10 by mid- 2023, despite the fact that it is down over 10% for the year.
The 12 month view was the lowest median 12 month euro prediction in five years, and nine analysts expect it to reach or breach parity by mid- 2023.
JPY POLL sterling, down nearly 12% against the dollar since the beginning of the year, is expected to regain half of its lost ground in 2022 over the next year, as the Bank of England looks set to raise interest rates. A number of issues are likely to keep the currency under pressure in the near-term, according to GBP POLL.
It feels to me that the whole world hates sterling, and I can see why. The Bank of England is in a difficult situation, and we are faced with a lot of stagflationary pressures here in the UK, according to Rabobank's Foley.
I don't think investors are going to come back into sterling until they see more optimism with respect to growth. Emerging market currencies will struggle to stem the dollar's losses against the dollar in the near-term, as investors seek the safety of dollar denominated assets.
While China's heavily controlled yuan, the Indian rupee and the Malaysian ringgit were predicted to trade around where they are now over the next three to six months, the Russian rouble and Turkey's lira were expected to fall.