In This Article:
By Hari Kishan
BENGALURU (Reuters) - The dollar is losing some of its appeal, according to strategists polled by Reuters, who said the U.S. currency's fortunes have reversed in line with the Federal Reserve taking a dovish turn on rate hikes.
Last year, the dollar outperformed on higher rates and a robust economy. But it had already started turning down before the Fed's policy U-turn last week on worries that the U.S.-China trade war was putting downward pressure on growth.
The poll of 70 currency strategists taken Jan 31-Feb 6 showed the U.S. dollar is forecast to give up most of 2018's gains against major currencies over the coming year.
Nearly 80 percent of strategists who answered an additional question said the dollar rally has already stalled, up sharply from over 60 percent one month ago.
The remaining respondents who expect the dollar's ascent to continue said better U.S. economic performance versus its peers and a reassessment on rates by the Fed will drive the greenback further.
But Fed Chairman Jerome Powell said the case for rate increases had weakened in recent weeks, citing "cross-currents" such as slowing growth overseas and the longest federal government shutdown in history that just ended.
That clearly indicates the Fed will adopt a cautious approach this year following four rate increases in 2018, a view held by a majority of economists in a separate Reuters poll.
"It seems that the 2018 playbook of the dollar strength – U.S. growth out performance, continued Fed rate hikes, and tighter liquidity conditions from the balance sheet – is reversing," noted strategists at Morgan Stanley.
"Forward-looking U.S. data such as business and consumer confidence suggest a slowing domestic economy, and the shift in Fed rhetoric suggests that rates will be lower and the balance sheet larger than previously thought. This is a recipe for dollar weakness."
The latest poll once again predicted most major currencies will strengthen against the dollar in the year ahead.
But any significant gains for other currencies will likely be limited. A synchronized global economic slowdown is already under way, keeping major central banks on the sidelines.
"This is probably as good as it is likely to get for the dollar," said Lee Hardman, currency strategist at MUFG, adding: "the Fed has become more dovish than we had anticipated more quickly and has increased the risks that the dollar may weaken more notably."
"But the other side of the coin is the story outside of the U.S. - the fundamentals are still weak and it is difficult to find currencies to stop the dollar at this point in time."