Dollar to stay strong as markets push back bets on Fed rate cut: Reuters poll

Sarupya Ganguly reported

BANGALORE (Reuters) - The U.S. dollar is set to remain strong in the coming months as financial markets continue to postpone expectations about the timing and magnitude of the Federal Reserve's interest rate cuts, according to foreign exchange strategists polled by Reuters.

So far this year, the dollar has strengthened by about 3.3% against a basket of major currencies, a reversal of the short-lived downtrend seen at the end of 2023, with net long bets on the greenback reaching its highest point since September 2022, according to trader position data.

The strong U.S. economy and persistent inflation have forced financial markets to reconsider their bets on when the Fed will cut interest rates for the first time.

While the market now expects the Fed to cut rates in June by about 60%, they have priced in a rate cut of about 75 basis points this year-something that some policymakers have called "bearable" and in line with the Fed's own forecasts.

However, this is significantly lower than the nearly 150 basis point rate cut expected earlier this year, suggesting that the dollar is likely to remain dominant in the near term.

In a Reuters poll conducted between March 28 and April 3, currency strategists predicted that none of the major currencies would recoup their year-to-date losses against the dollar for at least the next three months.

"Markets are coming to realize that this is not a 'cut no matter what' environment, but a 'no rush to adjust' environment ....... This will continue to provide support for the dollar, at least until the trend of slowing inflation becomes clearer," said strategists at Goldman Sachs.

The euro traded near $1.08 on Wednesday and is expected to rise about 1.0% to $1.09 by the end of June, making slight progress in its year-to-date decline of 2.3%. According to the median forecast of 90 foreign-exchange analysts, the yen will rise another 1.0% to $1.10 in six months.

Yen is still the preferred arbitrage currency

The yen is down nearly 25% since the beginning of 2022 and about 1% after the Bank of Japan (BOJ) raised interest rates for the first time in 17 years last month, and is expected to be one of the biggest gainers against the dollar among major currencies in the coming year.

Currently, the yen is trading at 151.7 against the dollar, and is expected to rise about 6.1% to 143 by the end of September, and then another 2.9% to 139 in 12 months. the Bank of Japan is expected to raise interest rates at least once more this year.

However, the median response of about 30 respondents to an additional question indicated that the yen, which hit a 34-year low last week, would fall to a minimum of 152 yen per US dollar this month. The responses ranged from 151.8 to 155.0.

Japan recently said that they may take "decisive measures" to deal with the weak yen.

The last time Japan intervened was in October 2022 when the yen fell to a low of around 152 yen per US dollar.

When asked if the Japanese Yen is still the preferred financing currency for interest rate hedging (i.e., borrowing low-interest rate currencies to invest in high-yield currencies), 26 out of 30 respondents (nearly 90%) said yes.

The remaining four chose Swiss francs.

"The news of the BOJ's removal of its negative interest rate policy/yield curve control has been highly publicized and has essentially been fully priced into the FX market," says Bank of America FX Strategist Alex Cohen... ...As a result, we are getting a classic 'buy the rumor, sell the fact' type of reaction in the yen.

"Arbitrage remains a key driver of the yen and the yen should continue to be used as a funding currency. The shift in policy rates from slightly negative to slightly positive noodles will not change this.

(Other reports of Reuters' April FX poll:)

(Reported by Sarupya Ganguly; analyzed by Pranoy Krishna and Purujit Arun; surveyed by Devayani Sathyan, Vijayalakshmi Srinivasan, and Rahul Dushyantbhai Trivedi; edited by Paul Simao).