The latest Reuters survey results on the USD outlook.
Risk assets have had their worst start to 2022 since the global outbreak of COVID-19 – in 2020, propelled the US dollar to a near two-decade high last month.
A slight rally in global equity markets over the past week has sent the USD down slightly from previous highs, leading some to begin to think that the dollar’s bull run is over. However, most analysts and traders say it is still too early to discuss that.
“I can read reports about the return of risky assets and stock market analysts are enthusiastic. However, I don’t buy it (stocks) … they are just small highlights among the lackluster news,” said Jane Foley, head of forex strategy at Rabobank.
Indeed, nearly two-thirds of strategists, specifically 28 out of 44, say the recent dollar drop will last no more than three months.
Among them, 16 said that the USD downtrend will end as early as the end of June; and only 7 people choose the scenario where USD will depreciate within another year.
The dollar’s unique combination of being both a safe-haven and a way to profit from higher interest rates is unprecedented and won’t go away anytime soon.
“The USD offers safety, yields and growth,” said Jamie Fahy, Citi’s global macro and asset allocation strategist, adding that “the Fed looks like it will still be a” hawk “stands out” from his peers the European Central Bank, the Bank of England and the Bank of Japan.
These overarching factors are likely to keep the dollar strong in the short term.
The latest data from the Commodity Futures Trading Commission (CFTC) shows that speculators were net buyers of the US dollar. This trend started almost a year ago and is expected to continue.
The majority of analysts, 25 out of 39, who responded to an additional question said a strategy of buying the dollar and selling emerging or other major currencies would account for the majority of transactions. in the next three months.
However, a broader survey of nearly 60 currency strategists suggests that the dollar will weaken slightly within 12 months.
Accordingly, while the euro, Japanese yen, British pound and Swiss franc are forecast to appreciate against the dollar over the next 12 months, there is no forecast that such increases will be enough to offset the decline in the value of USD. These coins are calculated from the beginning of the year to the present.
The dollar’s closest rival, the euro, is expected to rise around 4.0% to reach $1.11 within the next year. For years to come, however, the euro was headed in the opposite direction.
Explaining that view, Mr. Foley of Rabobank said “when you move to longer term plans, 3 years, 5 years, we tend to move (forecast) towards fair value levels. “
Currency strategists also expect emerging-market currencies to struggle to hold on to recent gains later this year, as the U.S. Federal Reserve raises interest rates and fears of high inflation push the dong. dollar maintained in the lead.
Having just recovered from a nearly two-year drop, the positive sentiment in emerging market currencies has been dampened by rising US Treasury yields.
Last month, strong inflows into the safe-haven USD pushed the emerging market currency index to its lowest level since late 2020. Fortunately, the currencies have since recovered. when the market narrowed bets on the possibility of the Fed raising interest rates sharply – causing the greenback to weaken a bit.
The majority of forex strategists surveyed between May 30 and June 1 said the recent weakness in the dollar will be short-lived and will strengthen. against most emerging market currencies at the end of August.
“It’s a perfect storm for emerging money markets in 2022 – Fed hawks, RussiaU-kraine conflict, now,” said Min Dai, currency strategist at Morgan Stanley. Russia’s Debt Selloff and China’s Recession”.
“Earlier in the year we hoped that emerging economies’ currencies could recover in 2022 after painful 2021, but the reality is the opposite.”
Almost all past emerging market crises have been linked to dollar strength. As the dollar appreciates, developing countries have to tighten monetary policy to depreciate their currencies. Failure to do so will exacerbate inflation and increase the cost of dollar-denominated debt.
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