Hari Kishan

BENGALURU, Reuters – A Reuters survey of FX strategists revealed that the dollar will perform mixed against other major currencies. Investors are likely to favor those with higher rates over short- and long-term.

To curb inflation, which is running at high levels in the United States and around the world for many years, there have been calls to tighten monetary policy. This has prompted money market participants to forecast rate increases and they are at odds with projections by central banks.

These expectations led to yields on U.S. Treasuries as well as other sovereign debt rising, with the longer end of the curve seeing the most significant increase in more than one year. This trend is expected to continue.

While rising Treasury yields helped dollar maintain gains, other rate-hike speculation seems to be limiting the dollar’s strength.

The market has taken a strong position in many places regarding the central bank’s plans. The market is almost like they don’t listen to central banks. It’s as if the market doesn’t know what central banks will do,” John Hardy of Saxo Bank, Head of FX Strategy.

“In the immediate term, I expect that the dollar will finish the quarter about flat in broad terms. But, it will weaken next year.”

A poll of almost 70 foreign exchange experts found that nearly all major currencies were trading above current levels within the next 12 month. This is a belief these analysts held for years, even when the dollar fluctuated higher.

The currencies with higher interest rates are expected to perform better than the rest.

Expectations for the British pound and New Zealand dollars to rise 2.9%, 1.6%, and 2%, respectively. They are all expected to raise rates next year by their central banks. [ECILT/GB/][NZ/INT][ECILT/CA]

This was however not enough to significantly reduce the dollar’s strength. They were also not predicted to recover their loss of 5%, 9%, over the next twelve months, as its closest competitors, the Japanese currency and the Euro.

According to poll, the greenback is likely to retain a significant portion of 2021’s nearly 4.5% increase for another year.

Some analysts believe the dollar may strengthen.

We expect broad dollar strength and believe the dollar will grow further. Brian Rose, Senior Economist at UBS Global Wealth Management said that the Fed’s move towards tapering should support the dollar.

The most fragile currencies are those where rate increases don’t seem likely. Are there currencies where central banks hike? These currencies are more stable. However, we believe that the dollar will still gain broad support.”

However, analysts believe that the price increases are temporary. Also, unemployment rates remain below their pre-pandemic levels. This suggests some moderation in interest rate pricing.

Jane Foley of Rabobank, Head FX Strategy at Rabobank stated: “The truth is that if interest rates go up as rapidly as the market expects… we could face recession in many places.”

(For more stories about the November Reuters foreign currency poll, click here