Dollar to remain steadfast in coming months: FX strategists

The U.S. dollar will hold its ground against most major currencies over the coming three months as a resilient domestic economy bolsters expectations interest rates will remain higher for longer, according to FX strategists polled by Reuters.

Despite net short dollar positions hitting their highest since March 2021, the greenback has gained nearly 3 per cent (.DXY) from its lowest in more than a year on July 14 amid receding expectations for Federal Reserve interest rate cuts.

Renewed strength in the dollar coincided with a dent in the euro's stellar run over the past few weeks - it is still up roughly 2.4 per cent against the dollar for the year - on firming expectations the European Central Bank is done hiking rates.

The dollar is unlikely to give up recent gains in coming months, according to the July 31-Aug. 2 Reuters poll of 70 FX strategists, which showed most major currencies would not reclaim their recent highs for at least six months.

In response to an additional question, 27 of 40 FX strategists said net short USD positions would either not change much or decrease over the coming month, suggesting the dollar would be rangebound.

"The Fed delivered what very well might have been the last hike of the cycle. Inflation is falling and labour market rebalancing has come a long way. Typically, these conditions often coincide with a more negative dollar outlook," said Kamakshya Trivedi, head of global FX at Goldman Sachs.

"We still think that is the right direction, but think dollar depreciation will be shallow, bumpy and differentiated...dollar assets will provide a hard bar to beat for some time to come."

Meanwhile, the euro's recent rally has likely come to a halt and it will trade around the current level of $1.10 in three months based on the view the ECB is done.

"Do we have more ground to cover? At this point in time I wouldn't say so," said ECB President Christine Lagarde last week after delivering a widely anticipated 25 basis points (bps) rate increase.

"The euro comes into August with short-term rate differentials drifting against it and long EUR futures positions looking vulnerable. Something needs to happen to boost confidence in another 25 bps ECB hike, or the positioning will drag EUR/USD down," noted Kit Juckes, chief FX strategist at Societe Generale.

"Unless, of course, the U.S. data this week are bad enough to shift the conversation back to when the Fed will start easing. So, data-sensitive, but if all the data is dull, the euro has a problem this month."

In contrast, the Bank of England, which is set to deliver a 25 bps rate hike later on Thursday with a significant risk of a larger 50 bps move, is expected to hike far more than its major peers.

Sterling - one of the best-performing G10 currencies this year - was forecast to gain only mildly to trade at $1.28 from the current level of $1.27 in the next six months, a slight upgrade from last month.

But the Japanese yen, which has lost around 9 per cent against the dollar this year, was expected to stage a comeback and gain over 6 per cent to trade at 135/$ in six months as the Bank of Japan is expected to tweak its yield curve control further.