Undeterred by dollar's renewed strength, analysts see weakness ahead - Reuters poll

By Hari Kishan

BENGALURU (Reuters) - Foreign exchange strategists are sticking with their forecasts for a weaker dollar despite having been wrong-footed for years in predicting a downturn in the greenback, the latest Reuters poll showed.

The dollar hit an 11-month high this week and is up nearly 3.5% this year against a basket of currencies as expectations that U.S. interest rates will stay higher for longer take hold.

Much of the greenback's strength has been driven by Treasury yields, which have soared to 16-year highs, based on the resilience of the U.S. economy in the face of the Federal Reserve's interest rate rises since March 2022.

That outlook remains at odds with the consensus view in Reuters foreign exchange polls, including the latest Oct. 2-4 survey of 80 FX strategists, which showed forecasters still expect the dollar to weaken against most major currencies.

Adam Cole, the chief currency strategist at RBC, says he is biased toward a stronger dollar but admits the prevailing foreign exchange view in markets remains a tough nut to crack.

"If you look at consensus forecasts, the consensus has been dollar negative for five years now and it hasn't worked," Cole said. "I don't think the timing is right for that call yet."

Net U.S. dollar positioning by traders was long for the second week in a row, according to the latest Commodity Futures Trading Commission data.

Despite a base case that showed the dollar weakening over the 12-month polling horizon, analysts who answered additional questions in previous polls have repeatedly said their bias was for the greenback to strengthen in the near-term period.

EURO'S UPSIDE LIMITED

The dollar has dominated nearly all major currencies this year, demonstrating particular strength against the currencies of countries whose central banks didn't hike rates or failed to keep up with the Fed's monetary tightening.

One notable outlier among major central banks is the Bank of Japan, which has made the yen one of the worst-performing major currencies this year, down over 13%. Trading below 150 per dollar on Tuesday, it was expected to recoup more than 10% in a year to trade at 135 per dollar.

"If they (BOJ) keep on threatening and they don't do it, finally, the market's going to say you're not going to intervene and dollar/yen moves higher, so it's a bit of a poker game," said Jane Foley, head of FX strategy at Rabobank.

"The longer they can get away with verbal intervention the better. As far as they're concerned they keep their powder dry."

Losses among most major emerging market currencies polled by Reuters ranged between around 2% to as much as 32%, and they were not expected to recoup those losses over the coming year.

At roughly $1.05, the euro was faring better than the yen and emerging market currencies. But it is down 2% on the year, far behind where most expected it to be in a January poll, when the consensus view was for about a 4% rise against the dollar by the end of this year.

While the euro was forecast to claw back all of those losses and gain around 6% in the next 12 months, the currency's upside will be limited by a weak euro zone economy and expectations the European Central Bank is done hiking rates.

Among 20 analysts who answered a separate question on how low the euro will go this month, the median view was $1.04, with only one respondent saying the currency would touch parity. But no forecaster had a parity call anywhere in their point predictions.

"We talked about putting parity on the forecast table and in the end we didn't, only because when you start putting parity on the forecast table, it just creates a little bit too much attention. So we went for $1.02," Rabobank's Foley said.

"I think if the euro is down at $1.03, $1.04, quite obviously people will be talking about the risks of parity, it will become a lot closer and I will not rule it out for early next year."

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