The Dollar Index, which gained almost 7% against the major currencies last year, continued its exceptional performance and rose a further 4% since the start of the year, half of these gains having been recorded in the during the month of March alone.
Much of this strength has been fueled by comments from Federal Reserve officials who, in addition to calling for 50 basis point rate hikes, openly talk about aggressively reducing the size of its balance sheet by nearly 9,000 billions of dollars.
This has pushed US Treasury yields to multi-year highs and investors into dollar-denominated assets, a key part of strong dollar trading that isn’t expected to fade anytime soon, keeping the currency buoyant.
Speculators’ net long bets on the dollar hit an 11-week high in the past week, according to data from the U.S. Commodity Futures Trading Commission released on Friday.
More than two-thirds of analysts who answered a separate question, 37 out of 53, said the strong dollar trade would last at least another three months, with 17 saying more than six months.
Thirteen respondents said less than three months and the other three said the trade is already over.
“We have aggressive tightening coming this year from the Fed. We think the federal funds rate will probably hit 3% in the first quarter of next year, but (they could) even cut rates by last quarter of 2023,” said Chris Turner, global head of market research at ING.
“I think the dollar could hold its gains for much of 2022…(and) we shouldn’t start looking for dollar weakness until maybe next spring-summer 2023.” (Chart: Reuters Exchange Rate Poll – April 2022 – https://fingfx.thomsonreuters.com/gfx/polling/znpneqmwxvl/Reuters%20foreign%20exchange%20poll%20-%20April%202022.png)
This view matches the median forecast from the April 4-6 poll of more than 80 currency strategists who expected the greenback to eventually give up some of its gains to other currencies.
But there are plenty of reasons to delay, not least the Russia-Ukraine war, which has sent the cost of energy and commodities skyrocketing, with Europe particularly hard hit.
“We view energy market developments as the biggest negative for EUR/USD – high prices are not going away any time soon,” noted George Saravelos, global head of equity research. currencies Deutsche Bank.
“On the other hand, the Fed’s revaluation is becoming less and less beneficial for the dollar, the ECB has exceeded our (hawkish) expectations and Europe’s fiscal response to offset the impact on near-term growth seems considerable.”
The euro is expected to erase its losses of more than 4% for the year and reach $1.14 in 12 months, a view that analysts have held for more than two years. The common currency has not advanced against the dollar for three consecutive months since September 2020.
(For more articles from the April Reuters poll on exchange rates:)