U.S. dollar to stay dominant so long as Fed stays hawkish: Reuters

By Hari Kishan and Shrutee Sarkar

BENGALURU (Reuters) – The U.S. dollar will remain dominant for now so long as the Federal Reserve stays a hawkish course on interest rate hikes and its intentions to unload some of its pandemic-related bond purchases, according to a Reuters poll of forex strategists.

The , which gained nearly 7% against major currencies last year, continued its stellar performance and has risen another 4% so far this year, with about half of those gains in March alone.

Much of that strength was driven by comments from Federal Reserve officials who in addition to calling for 50-basis point rate rises are also speaking openly about forcefully reducing the size of its nearly $9 trillion balance sheet.

That has driven U.S. Treasury yields to multi-year highs and investors into dollar-denominated assets, a key part of the strong dollar trade that is not expected to fade any time soon, keeping the currency well-bid.

Market speculators’ net long bets on the dollar rose to an 11-week high in the latest week, according to U.S. Commodity Futures Trading Commission data released on Friday.

More than two-thirds of analysts who answered a separate question, 37 of 53, said the strong dollar trade would last for at least another three months, including 17 who said more than six months.

Thirteen respondents said under three months and the remaining three said the trade is already over.

“We’ve got some aggressive tightening coming up this year from the Fed. We think the fed funds rate will probably hit 3% in the first quarter of next year, but (they could) even be cutting rates by the final quarter of 2023,” said Chris Turner, global head of markets research at ING.

“I think the dollar could hold onto its gains for a lot of 2022…(and) we shouldn’t be starting to look for weakening in the dollar until perhaps, next spring-summer 2023.” (Graphic: Reuters foreign exchange poll – April 2022 – https://fingfx.thomsonreuters.com/gfx/polling/znpneqmwxvl/Reuters%20foreign%20exchange%20poll%20-%20April%202022.png)

That view lines up with median forecasts in the April 4-6 poll of over 80 forex strategists who expected the greenback to eventually cede some of its gains to other currencies.

But there are plenty of reasons for delay, not least of which is the Russia-Ukraine war, which has sent the cost of energy and commodities spiralling higher, with Europe in particular feeling the pinch.

“We see developments in the energy market as the most important upfront negative for – elevated prices are not going away any time soon,” noted George Saravelos, global head of FX research at Deutsche Bank (DE:).

“On the flipside, further Fed repricing is becoming incrementally less beneficial to the dollar, the ECB has exceeded our (hawkish) expectations and Europe’s fiscal response to offset the near-term growth…