US dollar strength to fizzle, FX forecasters unmoved by searing rally

By Sarupya Ganguly

BENGALURU, Oct 2 (Reuters) - The US dollar will give up most of its recent gains over the coming year according to FX strategists polled by Reuters who made only minor revisions to long-held weak dollar views despite a rally of more than 3% in the greenback since early September.

But asked which was more likely in the near term, an 80% majority said the currency was likelier to beat their three-month forecasts than fall short, suggesting the potency of the dollar's recent rise as global bond markets convulse may be starting to sink in.

The greenback has been boosted in recent weeks by a September Federal Reserve interest-rate hike. At one point rate futures markets priced nearly four more.

Treasuries also suffered their worst sell-off since 1994 last quarter with both 10- and 30-year yields climbing to near-25-year highs this week.

But FX strategists, who have underestimated the dollar's strength in their three-month forecasts for nine straight months, again held to their bearish view in the September 30-October 2 poll.

Median views from nearly 70 forecasters put the euro at $1.14 in a month, up 1%, and $1.15 in both three and six months, up about 3%, before $1.16 in a year.

"The dollar can remain a little bit on the stronger side in the very near term....But beyond that in a six-month to one-year horizon, we are still in a bearish-dollar regime," said Jayati Bharadwaj, head of FX strategy at TD Securities.

FED RATE VIEW IN DRIVER'S SEAT

Much of the dollar's strength traces back to Fed Chair Kevin Warsh's focus on bringing down inflation, which has run above the Fed's 2% target for over five years.

Oil stuck above $100 a barrel has compounded the problem as the US-Israeli war on Iran, now in its eighth month, shows no sign of ending.

But TD's Bharadwaj, like others in the survey, expects the Fed to hike less than markets are pricing.

Kenneth Broux, head of corporate research for FX and rates at Societe Generale, sees the dollar sliding only once higher rates slow the US economy, which grew at a far-above-consensus 2.2% annualised rate in the second quarter.

YEARS OF WEAK DOLLAR BIAS

Reuters Polls data show FX forecasters have called for dollar weakness on the 6-12 month horizon for at least half a decade, getting it wrong as a group most of the time over the last two years of monthly polls.

Paul Mackel, global head of FX research at HSBC, among the few forecasters to call the stronger dollar correctly this year, sees the currency extending gains so long as markets expect the Fed to keep raising rates.

"The dollar is once again looking like the cleanest dirty shirt," he said, expecting strength at least through the first half of 2027.

Mackel rejected the consensus view of eventual weakness, saying forecasters have long carried a bias the currency must fall, relying on a framework that overlooks the side of the story tied to short-term interest rates and the resilience of the US economy.

"There's an underlying bias in the market that's gone on for decades against the dollar and it often is based on...valuation models that show it's expensive," added Shahab Jalinoos, head of G10 FX research at UBS, another to have caught on to the strong-dollar trend early.

"If the US consistently sees capital inflows and has consistently strong equity markets and foreign interest in its markets, that creates demand for dollars that maybe some of these more trade-focused models miss."

(Other stories from the October Reuters foreign exchange poll)