BENGALURU: The dollar's renewed strength against most major currencies will not fade away anytime soon, according to FX strategists polled by Reuters, who said it would take rate cuts from the Federal Reserve to weaken the currency substantially.
The greenback has recouped all of its roughly 3% losses for the year sustained through April on safe-haven bids related to recent concerns over the U.S. debt ceiling and growing expectations of a July rate hike after a pause in June.
That, along with receding rate cut calls for 2023, will support the dollar in coming months, analysts say, even if Fed policymakers decide to skip a meeting for the first time in an aggressive tightening campaign that began in March last year.
Most major currencies were not expected to reclaim their end-April levels against the dollar at least until September, according to median forecasts from 74 market strategists polled June 1-7. That was a near-across-the-board upgrade compared with a May survey.
"The U.S. economy continues to surprise to the upside, while Europe and China have been weaker than expected...this pattern will have to abate before medium-term shallow dollar depreciation can come back into view," noted Kamakshya Trivedi, head of global FX at Goldman Sachs.
"At current pricing, 'sticking with skipping' in the midst of a buoyant risk backdrop would present some challenge to the dollar, but we suspect that downside will continue to be shallow and limited by U.S. macro performance."
Net USD short positions have eased over the past few weeks as the recent rally dampened bearish investors' mood who were hoping for a sustained weakness in the dollar following last year's multi-decade highs, according to data from the Commodity Futures Trading Commission.
That was contrary to what was predicted by most FX strategists in the May survey. Just over a half of respondents said net short dollar positioning would increase by end-May.
Despite markets expecting the European Central Bank and the Bank of England to go for at least two more rate hikes, versus one from the Fed, the euro and sterling were predicted to make only modest gains over the coming three months.
After declining more than 3% in May, the euro, currently at $1.07, was expected to gain just around 2% and trade at $1.09. Sterling was forecast to change hands at $1.24, broadly unchanged from the current level.
Mostly all major currencies were predicted to trade below their respective 2022 highs against the dollar - which were largely before the Fed began its tightening cycle - in one year from now.
A majority of respondents who answered an additional question said a rate cut by the Fed, which economists do not expect to come until next year, or a pause in its tightening cycle could lead to a sustained weaker dollar.
But a majority of economists in a separate Reuters survey predicted the Fed would pause in June for the first time in more than a year and keep its key interest rate at 5.00%-5.25% then and for the rest of the year.
A growing minority, however, expected at least one more hike between the June and July meetings.
"As the U.S. economy continues to demonstrate resilience in the face of higher rates, the rates market is pricing out rate cuts and could yet contemplate the idea that a June Fed pause, or skip, could be followed by another jump," said Kit Juckes, chief FX strategist at Societe Generale.
"The FX market is tracking short-term rates more closely than ever in the face of wider uncertainty, and with positioning still short USD, the current uptrend can continue for a while longer."
(Reporting by Indradip Ghosh and Shaloo Srivastava, Polling by Aditi Verma and Anitta Sunil; Editing by Alex Richardson)