Dollar’s vice grip on FX markets to loosen this year

By Hari Kishan

BENGALURU (Reuters) – The dollar’s vice grip on FX markets will loosen a bit this year, according to analysts in a Reuters poll who expect most currencies to post marginal gains against the greenback over the coming 12 months.

After enjoying complete domination over nearly every currency last year with the having its best annual performance since 2015, the run is over as the U.S. currency is expected to give back some of its gains this year.

The Reuters Jan. 3-5 poll of 65 forex strategists showed most major and emerging currencies gaining against the dollar over the coming year.

But with factors that helped the dollar’s outperformance expected to linger the predicted gains would be limited and not enough to offset heavy losses from the past couple of years.

“There is a general perception the dollar has peaked, but I don’t think we’re going to have a straight-line movement of dollar losses,” said Jane Foley, head of FX strategy at Rabobank.

“Even though the market is already beginning to debate when the Fed could potentially start to cut interest rates… hikes are still to come… there are also concerns about global growth and the combination of these two mean the dollar is likely to find bouts of strength.”

Asked whether the dollar risked ending 2023 higher or lower than their predicted levels, a strong 60% majority of analysts – 30 of 50 who answered the additional question – said the risk was to the upside while the other 20 said there was downside risk to their forecast.

Reuters Poll-U.S. dollar outlook: https://fingfx.thomsonreuters.com/gfx/polling/akpeqqdqbpr/Reuters%20Poll-U.S.%20dollar%20outlook-January%202023.PNG

Despite being wrong-footed for years predicting dollar weakness, analysts still clung to that view in the latest poll.

The euro, down nearly 13% over the last two years, was expected to only recoup around a third of those losses in a year.

Median forecasts showed the euro will trade at $1.04, $1.06 in the next three and six months respectively. It is then forecast to change hands around $1.10 in a year, a near 4% gain from current levels.

The Japanese yen took a beating last year, losing over a fifth of its value until late December when the Bank of Japan made a surprise tweak to its bond yield curve control. But it still ended the year 12% lower against the dollar.

It is expected to gain nearly 4% to trade at 128.00/dollar by the end of 2023.

With an expected slowdown in global economic growth and uncertainty over how long central banks will keep interest rates higher to temper inflation, analysts were split over which currencies would perform better against the dollar this year.

A strong minority of analysts, 24 of 50, said emerging market currencies; 13 said developed market currencies; nine said safe-haven currencies; and four said commodity-linked currencies.

“The emerging market currencies can probably outperform relative to the G10 and then also relative to the dollar over the longer term,” said Brendan McKenna, international economist and FX strategist at Wells Fargo (NYSE:).

“We’re still in an environment where yields associated with the emerging market currencies are still the highest and probably the most attractive.”

(For other stories from the January Reuters foreign exchange poll:)