According to a Reuters poll by FX strategists, the dollar will retain most of its recent gains for at least another six months, and for the most part because of the belief that the dollar would weaken.
The dollar index is up 14.0% since the start of last year, with about half of those struck this year alone, despite the fact that it was just below a 20 year high it hit last week.
The Federal Reserve just delivered a much anticipated 50 basis point rate hike and left the door open for several moves in the coming months to tame the highest inflation in four decades, as the rally shows few signs of abating.
A lot of monetary tightening has been priced into the dollar, which would normally suggest more limited upside room. Francesco Pesole, FX strategist at ING, said that at the same time, we think we wouldn't exclude more hawkish repricing in terms of terminal rate, for example, towards the 4.0% mark.
We think that the dollar strength induced by Fed tightening will last as long as the Fed doesn't push back against market pricing in terms of terminal rate. The Fed funds rate, now at 0.75% -- 1.00%, has far to go based on that analysis.
Expectations for the most aggressive monetary tightening in decades have roiled global financial markets, sending the benchmark S&P 500 down over 10.0% for the year and the US Treasury yields to three-year highs near 3.0%.
The May 2 -- 4 poll of nearly 70 strategists taken just before the Fed meeting showed analysts still expect the dollar to weaken over the next 12 months, while higher Treasury yields were expected to keep the dollar well-bid in the near term.
Lee Hardman, currency analyst at MUFG, said that front-loaded monetary tightening will have consequences for growth, which will lead to rate hike expectations being reduced later in the day.
In April, the euro lost 5.0%, its worst month in over seven years, down 7.0% for the year. It wasn't expected to recoup the majority of its year-to-date losses in 2022.
Even so, the euro was not expected to reach parity with the dollar.
A close to 60% of analysts, 16 of 28, who answered an additional question, said the chances that the currency will reach parity with the dollar over the coming three months was low to very low. The remaining 12 said they were high to very high.
The median forecasts showed that the common currency would rise to $1.07 and $1.09 in the next three and six months, a gain of 1.4% and 3.3% respectively. It traded around $1.055 on Wednesday.
It was predicted to reach $1.13 in a year, the level at which the euro started the year.
The Japanese yen is down more than 11.0% against the dollar this year and touched a two-decade low during its latest downward spiral. It was expected to recover only half of the losses to trade around 123 per dollar in the next 12 months.
When asked what is the weakest currency to fall to this month, 16 analysts who answered the extra question returned a median of 133, over 2.0% lower than where the yen was last trading on Wednesday. The forecasts were in the range 130 -- 136.
The yen was the worst performer among G 10 currencies this year, raising questions about its credentials as a safe-haven currency, even against the backdrop of the Russia-Ukraine war.
A strong majority of analysts said yes, if the recent breakdown in its safe-haven status was temporary.
It has lost some of its appeal as a safe-haven currency, but I wouldn't say this is a complete shift that will last for four years. "There are a lot of temporary factors that are at play at the moment," Pesole said.