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Dollar has the interest rate edge to rule for now, say FX analysts polled by Reuters -Breaking

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© Reuters. FILE PHOTO – A Korea Exchange Bank employee counts 100 U.S. dollars during a photo shoot at Seoul’s bank headquarters on April 28, 2010. REUTERS/Jo Yong-Hak

Hari Kishan

BENGALURU, (Reuters) – Interest rate differentials are expected to dominate forex sentiment over the next three-months, a Reuters survey of FX analysts revealed. This puts the U.S. Dollar in a unique situation to outperform its peer currencies.

On Wednesday, Federal Reserve Chair Jerome Powell gave additional impetus to the. He encouraged markets to speculate that the central bank might raise rates sooner than anticipated.

With this new policy push in place, it is expected that the dollar will find new supporters in the coming weeks. This includes analysts who continue to expect it to lose its strength in the short and medium term.

Paul Meggyesi from JP Morgan London, heads FX research said that the dollar was well-placed to replicate what it has a tendency to do.

“In general, the dollar rose by approximately four percent per month in broad index terms during the six-months preceding the Fed raise. That’s not a unreasonable expectation when considering how high the dollar could go this time.

Reuters poll graphic on major currency market outlook: https://fingfx.thomsonreuters.com/gfx/polling/zgvomnmxlvd/Major%20FX%20poll.png

Financial markets are still uncertain about Omicron’s new Omicron coronavirus version, which has increased volatility to levels never seen before this year.

The split of analysts polled was Nov. 29-Dec. 2. An additional question asked about the future direction for FX markets.

Of the 46 responses, 19 chose interest rate differentials as their most frequently given answer. 15 was chosen for new coronavirus types.

Ten analysts chose safety-haven purchasing, but two selected higher yield. One analyst, however, preferred commodity prices.

Analysts do not believe that major currencies will be able to recover the losses against the dollar even after this period.

Euro was expected to rise by 1.5%, while the safer-haven Japanese currency yen would drop another 2.2% over a one year. These currencies were both down about 7% and 9 percent respectively. Both currencies were forecasted to rise by 10% over current levels at the start of 2021 according to analysts.

Some analysts maintained that the dollar would ultimately weaken because the underlying reasons for its strength weren’t sustainable in the long-term.

“If you look at inflation, then it’s important to understand that they can do enough in the near future. It could take a year or two, but eventually you reach a point where they have done enough. After which you will see a period with dollar weakness,” stated Steve Englander (OTC), head of G10FX strategy at Standard Chartered.

This isn’t a rally for high-quality dollars. This is not the same as in late 1990s, when productivity was booming. It’s a kind of 70s rally, which is something we all know goes and comes.

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