The dollar has an interest rate advantage for the time being: Reuters poll Reuters

Author: Hari Kishan

BENGALURU (Reuters) – Interest rate differentials will dominate forex markets over the next three months, according to a survey by FX analysts, which put the US dollar in a unique position to outperform its peers.

It grew by almost 7% a year and made its best move since 2015, receiving more boost from Federal Reserve Chairman Jerome Powell on Wednesday, and fed the markets with speculation that the central bank would raise rates sooner than expected.

With that political momentum in its sails, it is likely that the dollar will find new conversions in the coming weeks among those analysts who expect further weakening in the short to medium term.

“The dollar is well positioned to repeat what it usually does,” said Paul Meggyyes, head of research at FX research at JP Morgan in London.

“On average, the dollar has risen four percentage points in broad indexes over the first six months of the Fed’s first rise, and that’s probably not a pointless projection to think about how much the dollar could rise this time around.”

Reuters survey chart for major currency market forecasts: https://fingfx.thomsonreuters.com/gfx/polling/zgvomnmxlvd/Major%20FX%20poll.png

But there was a lot of uncertainty in the financial markets about the new Omicron coronavirus variant, the volatility measures that have pushed it to an unprecedented level since the beginning of the year.

Analysts who split that out conducted a survey from Nov. 29 to Dec. 29. 2 additional questions about what the FX market would drive in the next three months.

The most common response, out of 19 out of 46 respondents, was interest rate differentials, with the second most common option being 15 for new coronavirus variants.

While nine chose to buy a safe haven, two said they were looking for a higher return, with only one analyst opting for commodity prices.

Beyond that period, analysts do not expect to recover the large losses that most major currencies have suffered against the dollar within 12 months.

The euro was expected to gain about 1.5% and the Japanese yen safe would fall by another 2% in a year. They are down about 7% and 9% this year, respectively. In early 2021, analysts predicted that the two currencies would be about 10% higher than the current levels.

However, some analysts believed that the dollar would eventually weaken because the factors underlying the strength of the greenback were unbearable in the long run.

“If you’re looking at inflation, you have to keep in mind that you’re looking at the near term, it could be a year, a year and a half, but ultimately there’s a point. Englander Standard Chartered (OTC 🙂 Heads of G10 FX strategy.

“I would say this is not a high quality dollar rally. It’s not like when you saw productivity rise in the late 90’s. It’s like a 70’s rally, we know it’s coming and going.”