Dollar weakness to stall as markets beat Fed rate cut eggs: Reuters poll by Reuters

By Sarupya Ganguly

BENGALURU (Reuters) – The U.S. dollar’s recent weakness will stall over the next three months, despite financial market traders increasing bets on a Federal Reserve interest rate cut, according to most currency strategists polled by Reuters.

After rising about 5% against a basket of major currencies through the middle of the year, the greenback has lost almost all of its gains as interest rate futures began to price in around 100 basis points of Fed easing this year, nearly double what was expected in June.

That was driven in part by July labor market data showing signs of slowing, supported by reassurances from Fed Chairman Jerome Powell in his latest speech in Jackson Hole suggesting rate cuts are on the way.

Interest rate futures markets are fully bearish this month on a 25 basis point Fed rate cut, with around 40% for another 25 basis point cut, suggesting significant risk of a halving of point.

“There will probably be a bit of volatility in the markets over the next week or two. “Wages data will ultimately determine whether the Fed goes to 50 or 25 on September 18, and that will drive the short-term direction of the dollar,” he said. Shaun Osborne, Chief Currency Strategist at Scotiabank.

Economists in a separate Reuters poll had expected data due on Friday to show 160,000 job additions in August, a rebound from July’s 114,000 increase and the jobless rate falling marginally to 4.2 percent.

The euro was forecast to fall only about 0.5 percent, from about $1.11 currently to $1.10 by the end of November, according to Reuters median forecasts Aug. 30-Sept. 4 of 76 FX Strategies.

It was then forecast to rise to just $1.11 by the end of February and $1.12 in a year, suggesting limited gains for the common currency.

“We wouldn’t be too dismissive of the dollar’s weak August – the dollar is starting from a highly valued position, the Fed can and looks likely to adjust real rates faster than other major central banks,” said Kamakshya Trivedi , head of the global department. FX, Rates and EM Strategy at Goldman Sachs.

“However, we would be resilient against further significant dollar weakening without a change in the relative growth and asset return outlook.”

The latest positioning data from the Commodity Futures Trading Commission, however, showed speculators reversed their net short bets on the greenback for the first time since February.

A majority of nearly 70%, 45 out of 66, who answered a supplementary question, said the dollar could stay around the same level or bounce back. The remaining 21 said it would lose more weight.

“The market is pricing in 100 basis points of interest rate cuts between now and the end of the year is quite aggressive and at this point, hard to see given that there is still quite decent momentum behind the US economy,” he added Scotiabank’s Osborne.

A separate Reuters poll of economists, more consistent in outlook over the year, predicted a 25bp rate cut at each of the Fed’s three remaining meetings this year.

“We think the recent dollar weakness has been exaggerated. Yes, the economy isn’t great, but other than maybe the unemployment rate, there are very few indicators that point to a recession. Most indicate a slow and we do not believe. The Fed will do 50 to slow,” said Steve Englander, global head of G10 FX research at Standard Chartered (OTC: ).

Among other major currencies, the Japanese yen, which has gained about 12 percent against the dollar since hitting a 38-year low in July, on a sharp slowdown in freight trades and a rate hike from the Bank Japan, it would be one of the biggest. winners, the poll showed. It was expected to rise nearly 4 percent to about 139.67 per dollar in a year.

(Other stories from September’s Reuters currency survey)