Dollar to resume rally soon on Fed hike expectations: Reuters poll

By Sumanta Dey

(Reuters) – The U.S. dollar will soon resume its rally, provided the economy recovers from a weak start to the year sufficiently to justify an interest rate hike from the Federal Reserve, a Reuters poll showed.

The greenback has rallied some 20 percent since last summer in a nearly one-directional move after a raft of strong economic data in the United States raised the chance of a rate hike, at a time when other central banks have eased policy to fight deflation risks.

While that historic move higher recently stalled owing to some disappointing economic reports, 38 of 43 strategists polled this week said the dollar was just taking a pause in its ascent.

The dollar index <.DXY> is expected to end the year almost 8 percent higher at 102.8, the highest since early 2003.

While net long positions have declined in the past month, the dollar remains the favorite long bet among speculators, U.S. Commodity Futures Trading Commission data show.

Much of that confidence is tied to hopes of better economic data in the second quarter after no growth in the first three months of this year. That would confound a pattern of lackluster rebounds that has set in over several years of recovery.

“We expect policy divergence to remain a key theme through 2015 and if the U.S. data picks up as expected then this can provide room for the Fed to hike rates later this year,” said Melinda Smith, FX analyst at RBS.

“While there may be more of a pause in the stronger dollar theme, it will resume once data starts to pick up again. This can prove dollar-supportive, particularly at a time when other central banks are sounding more dovish or easing further.”

The April jobs report due Friday will be key for Fed rate expectations and so for the currency too. Economists predict that 224,000 jobs were created last month, a sharp rise from the 126,000 in March, which was the smallest number of new jobs added in more than a year.

So far wage growth has disappointed, which has prevented the Fed from tightening policy as it targets inflation as well as full employment.

A majority of Wall Street’s top banks, along with other economists, now see the Fed holding off until the third quarter before raising rates, dropping long-standing bets for June.

Still, if the dollar does rise by as much as expected, it could hurt the U.S. economy by making exports less competitive while also keeping a lid on prices and curbing wages, and paradoxically making rate rises less likely.

EURO

The poll also showed the euro would stay under pressure, in part as the European Central Bank conducts sovereign bond purchases, or quantitative easing.

The euro will likely trade around $1.09 in a month, $1.04 in six months and $1.03 in a year, similar to conclusions from last month’s poll.

Two-thirds of strategists who answered an additional question — 21 out of 33 — said Greece exiting the euro zone posed only a small risk to their current euro forecasts. Seven rated it a major risk while five said there was no risk at all.

“The risk of Greece leaving the euro zone is fairly small. Concerns over Greek funding and reform issues are likely to continue over coming months but ultimately we expect an agreement to be made,” said RBS’ Smith.

Still, 26 of 58 analysts in the survey forecast the euro dipping to parity against the dollar or lower some time over the next year.

(Polling by Siddharth Iyer and Aaradhana Ramesh; Additional reporting by Ashrith Doddi; Editing by Ross Finley and Gareth Jones)

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