The US dollar will keep its strong position against major currencies in the next three months, say currency analysts polled by Reuters. It will be buoyed by the security of the domestic economy and the likelihood that interest rates will remain high for the foreseeable future.
Even though net short positions in the US dollar have hit their biggest level since March 2021, the dollar index is still up almost 3 percent from its yearly low on July 14, when the Federal Reserve downgraded its rate cut prediction.
For the past several weeks, the strengthening of the dollar has coincided with the weakening of the euro. At the same time, the value of the euro has increased against the dollar by around 2.4% per year as a direct result of the European Central Bank's decision to stop hiking interest rates.
According to the findings of a poll of 70 currency strategists that was conducted between July 31 and August 2, it is anticipated that the dollar will maintain its recent upward trend in the next few months. It is expected that it will take at least half a year for the majority of the major currencies to recover from the recent high they have reached.
In response to a follow-up question, 27 of 40 currency strategists predicted that assuming the dollar would continue within its current range, net short positions in US dollars would either not change considerably or would drop over the next month.
The Fed has likely finished raising interest rates for the foreseeable future. Goldman Sachs experts state that lower inflation and a steady recovery of the labor market are often associated with negative prospects for the dollar.
In the meantime, the ECB predicts that the euro's recent rally will taper off, with the currency trading at roughly $1.10 in three months.
Is there anything else that ought to be mentioned? Christine Lagarde, president of the European Central Bank, said no after the widely anticipated rate hike of 25 basis points was announced last week.
According to Societe Generale's chief currency strategist, short-term differences in interest rates work against the euro as August begins, and long positions in euro futures look vulnerable at this time. Something is needed to strengthen confidence in the upcoming increase in the ECB's rate by 25 basis points. Otherwise, the positioning will drag the EUR/USD down.
Much hinges on the US data this week and how it will affect discussions regarding the Fed's possible loosening of its monetary policy. This makes the data extremely important; if it turns out to be boring, the euro may have a rough month.
However, the Bank of England aims to raise rates by 25 basis points later this week, and a 50 basis point increase is a distinct possibility. This would result in a rate hike that is larger than that of its key rivals.
One of the strongest G10 currencies this year, the pound sterling, is expected to climb significantly over the next six months and trade at $1.28, up from the previous month's projection of $1.26.
It is also anticipated that the Japanese yen, which has decreased by around 9% against the dollar so far this year, will recoup some of its losses, rising by more than 6%, and trade at $135 in the next six months. This is because it is anticipated that the Bank of Japan will adjust the way it controls the yield curve in the future.
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