The US dollar, which has dominated currency markets since last year, will stay strong for another three to six months before starting to cede ground to most other major currencies, a Reuters poll found. Weak economic data and cautious comments from non-US policymakers have encouraged currency speculators to increase their bets in favor of the dollar to the highest since 2015, according to positioning data from the US Commodity Futures Trading Commission.
After gaining over 4 percent in 2018, the dollar is up about 2 percent this year. The poll of nearly 70 strategists taken April 29-May 2 found that the dollar will give up this year's gains against most major currencies in 12 months' time. Its relative strength is forecast to last at least through October, according to more than three quarters of the strategists who answered an extra question.
The expectations for dollar strength in the near term - and analysts in Reuters polls have been wrongfooted for nearly two years in their predictions for a weaker dollar - are largely driven by better-than-expected growth data in the United States. Federal Reserve Chair Jerome Powell said on Wednesday that factors dragging on inflation might be transitory and he saw no case for a rate move in either direction.
"We continue to expect the Fed to remain on hold this year and hence the monetary easing currently priced in to gradually unwind. That will provide support for the dollar initially, but later this year as global growth picks up, we expect the dollar to then gradually depreciate," noted Lee Hardman, currency analyst at MUFJ.
For Nick Bennenbroek, head of FX strategy at Wells Fargo, markets and analysts had been too optimistic on foreign currencies and too pessimistic on the dollar because they set their forecasts for economic growth outside the United States too high.
"We have definitely become less bearish on the US dollar and less bullish on foreign currencies," he said. Nearly three-quarters of strategists who answered a separate question said the risk to their dollar forecasts was skewed to the upside.
The poll consensus was for the dollar index to underperform over the coming 12 months, with the euro forecast to gain 5 percent to $1.18 - a similar prediction to last month. "US assets have received considerable inflows due to relative economic strength at home and economic weakness in the rest of the world... We expect this process to begin reversing later this year," said Hans Redeker, global head of FX strategy at Morgan Stanley.
"While the timing of our anticipated USD decline may have been pushed out as coincident data remain soft, the framework so far remains unchallenged."