(This story corrects error in euro exchange rate low in paragraph 10)
By Shrutee Sarkar
BENGALURU (Reuters) - The U.S. dollar’s dominance is forecast to fade soon, with any sudden change in expectations for the policies of other central banks posing the biggest risk, a Reuters poll of currency strategists showed.
Nearly 60 percent, or 35 of 60 analysts, who answered an additional question in a poll taken this week said the dollar’s recent resurgence would last about three months. Ten expect it to end within a month.
Fifteen analysts expect it to last for six months and the rest said it could be sustained for a year or more.
“We find it premature to crown the dollar king and extrapolate continued broad USD strength into and through the second half of the year,” said Daniel Hui, executive director of global FX strategy at J.P. Morgan.
“Cyclical divergence favoring the USD is fading as global data gradually stabilizes and global policy normalization is still the baseline case.”
(Graphic: Reuters FX poll - tmsnrt.rs/2k8GCSM)
Reuters foreign exchange polls late last year and in early 2018 had predicted a weaker dollar, partly because of a deterioration in the U.S. fiscal position despite higher interest rates. Only recently did the dollar buck that overall trend.
But expectations the Federal Reserve will raise rates next week and again later this year are already built into the dollar outlook. Predictions for the monetary policy of other central banks now matter more.
The euro rallied to a 10-day high against the dollar on Wednesday after European Central Bank Chief Economist Peter Praet said there would be a debate at the June 14 policy meeting, a day after the Fed is expected to raise rates, on ending the bank’s bond-buying programme by the end of 2018.
The ECB is expected to stop buying tens of billions of euros a month of bonds by December, according to a separate poll of economists.
Last week, the euro fell to a 10-month low of $1.1510, driven by the turmoil in Italian politics and signs of a slowdown in the euro zone economy, which cast doubts on whether the ECB would be able to withdraw stimulus this year.
That pushed the U.S. currency .DXY to a six-month high last week and up over 2 percent in May. But the latest poll of over 60 foreign exchange analysts taken June 1-6 indicated its rally could not be sustained.
That suggests the recent reduction in bets against the dollar, now at their lowest in five months, was just a large unwinding of net short positions from the 6 1/2-year high reached in April.
“The dollar’s short-covering rally is running out of steam with a lot of good news in terms of growth and rate expectations priced in,” noted Shaun Osborne, chief FX strategist at Scotiabank.
In the poll, taken largely before Praet’s comments, about 60 percent of over 40 analysts picked any change in monetary policy expectations as the biggest risk to the dollar. They considered that more important than the repercussions from any tit-for-tat trade war.
Indeed, an ongoing risk to the dollar stems from expected government bond issuance to pay for the tax cuts passed last year by the U.S. Congress.
“Fiscal expansion of such magnitude at this stage of the U.S. economic cycle will fuel fears on a larger deficit,” said Gavin Friend, senior markets strategist at NAB in London.
Other major currencies are forecast to rise over the coming year. Sterling is expected to recoup much of its losses since the June 2016 decision to leave the European Union.
The Canadian dollar is expected to strengthen on expectations that the Bank of Canada will raise interest rates again, based on solid growth there.
The euro EUR= is forecast to trade at $1.24 in a year, up over 5 percent from around $1.18 on Wednesday.
While the latest consensus for the single currency, driven by the political uncertainty surrounding Italy, was slightly weaker compared to the previous poll, the magnitude of the change from here in the June poll was more or less the same.
“In the short run, it’s not obvious to me who wins out in the FX market - Italy or the ECB. In the long run, if you assume that this (Italian politics) isn’t the crisis which brings Europe’s house of cards crashing down, and it really shouldn’t be, the ECB will dominate, in FX markets,” said Kit Juckes, chief FX strategist at Societe Generale.
The dollar rally has fuelled a sell-off in emerging markets recently, but South Africa’s rand is expected to perform better than its peers and recover over the next 12 months.
The Brazilian and Mexican currencies are also forecast to strengthen slightly, but the range of forecasts was extremely wide, suggesting that expectations for an imminent rebound from the recent sell-off may be too early.
Reporting by Shrutee Sarkar; polling by Mumal Rathore and Sarmista Sen; editing by Larry King