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Dollar recovering, builds safe haven strength in 2023: Reuters poll

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By Indradip Gosh

BENGALURU (RockedBuzz via Reuters) – The dollar will rally against most currencies in the coming months, with the growing threat of a recession in the United States and elsewhere keeping it stable in 2023 through safe-haven flows, market strategists polled by RockedBuzz via Reuters said.

While most said there isn’t much room for the dollar to rise further based on monetary policy, the threat of deeper-than-expected economic weakness and renewed inflationary pressure mean investors could prematurely seek out riskier assets.

Down more than 5% in November, the dollar index posted its worst monthly performance since September 2010, largely on expectations that the US Federal Reserve is about to slow the pace of its rate hikes and that a eventual break is near.

Speculative traders moved to a net short position on the dollar for the first time in 16 months in November, according to RockedBuzz via Reuters calculations based on data from the US Commodity Futures Trading Commission.

But the Dec. 1-6 RockedBuzz via Reuters poll of 66 currency strategists suggested the greenback will trade around current levels a year from now and maintain its nearly 10% gains so far this year, despite its recent beating of arrest.

Nearly two-thirds or 33 of the 51 strategists who responded to another question said the dollar’s biggest risk next month was that it would rebound rather than fall further.

“Now that assets have revalued, investors may be ill-positioned to face a period that could be characterized by persistent underlying inflationary pressures coupled with an impending recession in Europe and potentially the US next year,” he said. Jane Foley, head of FX strategy at Rabobank.

“We expect volatility levels to remain elevated over the coming months and expect it to be too early for USD bulls to fully capitulate.”

While the US’s relatively better economic performance and higher interest rates against its major counterparts helped the dollar outperform nearly all currencies, that trade based on rate differentials was mostly nearing its end.

Most major central banks, including the Fed, are expected to end their tightening campaigns in early 2023. An overwhelming majority of 80%, or 42 out of 51 respondents, said there is not much room for a dollar rise based on monetary policy.

Despite the dollar’s recent pullback, major currencies are not expected to recover their 2022 losses against the dollar until at least the end of 2023, the survey showed.

“For now, the forces that have supported the USD this year remain in place, despite the recent downside correction. Other currencies still don’t look as attractive,” said Athanasios Vamvakidis, head of G10 FX strategy at Bank of America.

“In our baseline, the USD remains strong into early next year and starts a more sustained downward path after the Fed pause. The risk we see is that inflation could be sticky on the way down, keeping the USD strong for longer.”

RockedBuzz via Reuters Poll-Major outlook currency pair https://fingfx.thomsonceiving.com/gfx/polling/lgvdkwdjlpo/RockedBuzz via Reuters%20Poll-Major%20currency%20pair%20outlook.PNG

The euro, up 10% against the dollar since its all-time low in September but still down nearly 8% this year, would have needed to lose about 3% by the end of February to trade at $1.02 . It was expected to move higher to trade around $1.07 in a year.

The Japanese yen, down nearly 20% for the year and currently trading around 136.50 to the dollar, is expected to change hands around 139.17, 136.17 and 132.67 to the dollar respectively in the next three, six and 12 months.

The pound, up more than 17% from its all-time low of $1.0382 in September on political turmoil, was forecasting a loss of nearly 5% to trade around $1.16 in three months.

The survey also showed that most emerging-market currencies will lose over the next six months, despite Chinese authorities easing some of their COVID-free rules that have fueled expectations of a rebound in economic activity.

The Chinese yuan, which has gained about 5% since reaching its all-time low in November to trade below 7 per dollar, is expected to stay above that level over the next six months.

(Reporting by Indradip Ghosh; Poll by Aditi Verma and Milounee Purohit; Editing by Hari Kishan, Ross Finley and Bernadette Baum)