FX analysts say dollar falls but could rebound

The dollar has fallen recently, but currency strategists expect a recovery in the near term, with the Fed expected to cut interest rates less aggressively. The dollar’s 5% decline in the last two months of last year is expected to be temporary as strategists predict the greenback will weaken next year.

Some market participants expect the Fed to begin easing policy in early March, but speculation about this policy has moderated. Minutes of the December policy meeting showed policymakers agreed that high borrowing costs should remain high for some time, reducing the likelihood of a rate cut in March.

The dollar rose against a basket of currencies after the release of the policy meeting minutes, gaining about 1% since the start of the year. Interest rate futures have reduced the odds of a rate cut in March to about 66% from 87% last week, according to CME FedWatch data on Wednesday. A further retreat in rate cut expectations could support the dollar in the short term.

Brian Ross, senior economist at UBS Global Wealth Management, believes that the dollar may rise in the short term. “In the short term, we think the dollar is likely to edge slightly higher, mainly because we think the market is pricing in a Fed rate cut too aggressively… Our base case is that the Fed will wait until May before cutting rates,” Mr. Ross explained . He also pointed out that the U.S. dollar has recovered recently and is likely to remain stable or rise slightly in the short term.

Despite the current situation, a majority of analysts (36 out of 59) see risks for the U.S. dollar to be stronger against major currencies over the next three months than currently forecast. The remaining 23 analysts see transaction risks as weak.

Looking further ahead, most analysts predict the dollar will fall against major currencies in 12 months as the Fed’s dot plot forecast points to three rate cuts before the end of the year. ING foreign exchange strategist Francesco Pesole predicts that as the economic outlook worsens, the dollar will fall, requiring the Federal Reserve to cut interest rates significantly. However, he expects depreciation in the first half of the year to be mild compared with recent months.

The euro, which rose 3% last year and is expected to benefit from narrowing interest rate differentials, is expected to rise more than 2% in 12 months and trade around $1.12, up from $1.09 on Thursday. The yen, which has lost about 30% of its value over the past three years, is expected to recover 6.6% in a year to around 135 to the dollar.

Sterling appreciated by more than 5% last year and is expected to appreciate by more than 1.5% by the end of this year, to $1.29. The Australian and New Zealand dollars are also expected to rise about 4% and 2.2% respectively.

Reuters contributed to this article.

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