U.S. Markets

Dollar set to rise in coming year, Fed in driver's seat: poll

(Reuters) - The U.S. dollar is set to rise over the coming year on revived expectations the Federal Reserve will follow through with an interest rate hike this summer, a Reuters poll showed, but only a slight majority say the rally will be “significant.”

An employee of a bank counts US dollar notes at a branch in Hanoi, Vietnam May 16, 2016. REUTERS/Kham

In recent weeks, better-than-expected data out of the U.S. have helped Fed officials, including Chair Janet Yellen, to talk the markets into pricing in a rate hike as early as July and pushed the dollar up against major currencies.

In line with that, currency speculators boosted their bets in favor of the dollar for the first time in six weeks, according to data from the Commodity Futures Trading Commission released on Friday.

That should pressure the euro and keep the European Central Bank to stand pat on monetary policy at their meeting later on Thursday and for the rest of the year, as forecast in a separate Reuters poll published last week. [ECB/INT]

“The policy divergence trade is back with a vengeance and investors are scrambling to buy USD against other G10 currencies,” wrote Valentin Marinov, head of G10 FX strategy at CA-CIB.

But not everyone agrees on the magnitude. Just a slight majority, 37 of 68 strategists, expect a significant dollar rally. The remaining 31 do not.

The euro EUR= lost almost 3 percent last month, but the latest poll of over 70 strategists conducted over the past week put the single currency only slightly weaker at $1.11 in a month from $1.12 on Thursday. It is then expected to slip to $1.10 in six months and $1.09 in 12 months, where it started the year.

While those forecasts were little changed compared to last month’s poll, the number of analysts calling for euro/dollar parity or lower over the coming year has fallen to just two compared with 15 at the start of 2016.

While most central banks nearly always say they don’t target exchange rates, a weaker currency is crucial for the success of the ECB’s and the Bank of Japan’s current policies, since it helps to import inflation and makes exports more competitive.

But the various stimulus measures, including negative interest rates adopted by central banks, have had little of the desired effect on exchange rates so far this year.

That suggests any further weakness in those currencies will more likely be driven by the Fed and the currency on the other side of the exchange rate - the dollar.

“Hawkish Fedspeak suggests earlier tightening is likely. While surprising, this likely supports the dollar near-term,” wrote Jeremy Hale, head of macro strategy at Citi.

The nearest-term risk to foreign exchange rates and indeed to global financial markets more broadly is whether Britain votes to stay in or leave the European Union on June 23. [GBP/POLL]

The other major risk is the U.S. Presidential election in November -- 33 of 52 analysts say their dollar forecasts are skewed to the downside in the run-up to that vote.

Still, with a stronger dollar view, analysts are sticking to a weaker yen outlook, despite the fact the yen rallied earlier this year when the Bank of Japan adopted negative rates.

The yen is forecast to weaken to 112 per dollar in three months and drop to 116 in a year from around 109 on Thursday, similar to predictions made last month.

(For other stories from the FX poll:)

Polling and analysis by Sujith Pai and Krishna Eluri; Editing by Ross Finley and Toby Chopra