The chances the euro will fall to or below parity with the US dollar this year have slipped in the past month to one in four from roughly one in three, according to the latest Reuters poll of foreign exchange strategists. That forecast comes even though the US Federal Reserve is expected to follow its first interest rate increase in nearly a decade last month with more this year, and as China's authorities are fixing the yuan lower on a daily basis.
The latest Reuters poll of over 60 foreign exchange strategists, taken this week, predicted the euro would trade around the current $1.07 in a month, weaken to $1.05 in three months and then weaken a bit further to $1.03 in a year. Even the number of analysts expecting a much weaker euro has declined compared with previous months. Some abandoned those forecasts after the latest European Central Bank meeting, which disappointed markets by holding monthly bond purchases at the current 60 billion euros and suggesting they won't be increased.
"We think he (ECB President Mario Draghi) is reaching the limits - both in terms of technical constraints on the pool of assets to buy and the Bundesbank's willingness to support further aggressive easing," wrote Karen Ward, an economist at HSBC. "Defending a weak euro may prove difficult in 2016 if the Fed's tightening cycle ends up being shorter or more gradual than the market predicts." Dollar demand has also diminished recently on uncertainty about how often the US will raise rates this year, despite assurances by several Fed officials in recent days they are comfortable with several.
Minutes of the latest Fed policy meeting suggested that some officials were still concerned that inflation would get stuck at dangerously low levels. Much will depend this year on broader risks to the global economy, and in particular what China's authorities do to prop up its slowing economy. "If Fed tightening is the driver, USD gains are seen as likely to be slow and broad-based, spread fairly evenly between G4 majors, commodity FX and EM FX," wrote strategists at Deutsche Bank in a note.
"If on the other hand, China, particularly China FX policy, becomes a source of instability, USD gains will be heavily concentrated in commodity and EM FX, while the G4 majors all outperform." The People's Bank of China on Thursday set the yuan midpoint lower for the eighth day in a row, making the latest fall between daily fixings the biggest since a 2 percent devaluation in August that triggered tremors in financial markets.
Markets fled to safe havens like the Japanese yen on fears that Beijing, in a bid to help exporters, is allowing the yuan's rapid depreciation to accelerate. That would suggest China's economy is even weaker than many currently believe. The dollar index, which rose over 9 percent last year, is predicted to end 2016 at 102.0, a little over 3 percent higher than its 98.7 on Thursday.
Currency speculators reduced bullish bets on the dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Monday. The US currency fell to a 4 1/2-month low of 117.66 yen on Thursday and is down over 2 percent so far this year. Positioning data also showed yen short positions declined to their lowest since October.