By Hari Kishan and Rahul Karunakar
BENGALURU (Reuters) – The U.S. dollar will hold sway in the near term, driven by demand for safe assets on a worsening global economic outlook, with other major currencies are at best expected to regain lost ground over the coming year, a Reuters poll found.
The rout in financial markets and near-certain global recession caused by the coronavirus pandemic has caused a scramble to secure dollar funds. That blew up the cost to borrow dollars in funding markets, with three-month FX swap spreads rising to 2008 financial-crisis levels last month.
But those spreads have snapped back after the Federal Reserve’s effort to improve dollar liquidity by making it easier for other central banks to swap their currencies for dollars, pushing speculators to cut their bets in favor of the dollar in the latest week.
“As markets fret anew about the scale of global dollar liabilities, I am impressed by the Fed’s resolve. The exorbitant privilege that the dollar affords the U.S. has a sting in its tail and the Fed is on the scorpion’s case,” said Kit Juckes, macro strategist at Societe Generale (PA:).
“I fancy the Fed to win this one in the end. ‘In the end’, though, doesn’t mean today, and there’s an army of dollar bulls out there taking the other side at the moment.”
The demand for safe-haven assets has pushed the dollar () to rise about 3.5% so far this year and register its best first-quarter performance since 2015.
While the Fed’s monetary policy easing should keep the dollar from surging, the dire economic outlook – confirmed by Reuters polls of economists, fixed-income strategists and long-term investors – was expected to keep the dollar’s gains this year intact in the near term. [ECILT/WRAP] [US/INT] [ASSET/WRAP]
“The global economy is heading into a recession due to the coronavirus and the USD should continue to outperform the most exposed currencies to global trade,” said Roberto Cobo Garcia, FX strategist at BBVA (MC:).
In response to an additional question, about 45% of analysts, 27 of 63, said the dollar would stay around current levels or trade within a range over the next three months. Twenty analysts forecast the dollar would fall; the remaining 16 said they expect it to rise.
“The dollar will do well all year against all the currencies that are dependent on growth. Long dollar trades are best against those overly-dependent on oil exports and the most growth-sensitive currencies – a long list, mostly emerging markets,” said Societe Generale’s Juckes.
“Economists’ forecasts are increasingly being revised in appreciation of how bad the short-term hit is going to be. After that, we’ll get the realization that while you can turn the lights off quickly in a crisis, getting them back on again is a slower business.”
But in a year from now, analysts predict, the dollar will weaken against most major currencies. That is a consensus view they have held as a group for nearly three years now, and so far, an incorrect one.
The euro, which has lost over 2% so far this year, was forecast to take back those losses to trade at $1.13 by this time in 2021.
But in the near term, the common currency, along with sterling and the Canadian dollar, were predicted to be the worst performers against the dollar in April, driven by its safe-haven status.
“We view the U.S. dollar a safe haven based on the fact that it is the world’s reserve currency and also there is an opportunity to hold Treasury debt as a high quality liquid asset – which has been outperforming and should continue to do so,” said James Orlando, senior economist at TD.
The stampede into dollars has hurt most emerging-market currencies, including the Brazilian real, the South African rand and the Russian rouble, which have lost about a quarter of their value and dropped to record lows. [EMRG/POLL]
Asked which emerging-market currencies will be the hardest hit in April against the dollar, a majority of analysts who responded chose those three currencies.
The Indian rupee, which fell to a record low on Wednesday, was expected to remain weak, with a significant minority of respondents predicting it would depreciate beyond that recent record low at some point over the next year. [INR/POLL]
Reuters poll graphic on U.S. dollar outlook https://fingfx.thomsonreuters.com/gfx/polling/dgkvlxrevbx/Reuters%20Poll%20US%20dollar%20outlook.PNG
(Polling by Khushboo Mittal, Sujith Pai and Indradip Ghosh; editing by Ross Finley, Larry King)