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 The dollar's 18-month surge came to an abrupt halt late last month
when it lost 3 percent in just under a week during the widespread
financial market sell-off on China-led global growth concerns.
That market rout sparked a rally in the euro, pushing it back up
toward the levels it was trading at before the European Central Bank
launched its stimulus program in March.
Recent euro strength and a sharp fall in commodity prices will
probably push the ECB to cut its inflation outlook on Thursday and
also promise to beef up its 60 billion euro monthly bond-buying
program, if the outlook worsens further.
Wild swings in world stocks, commodities and currencies has pushed
many to suggest the Fed may not raise rates this month after all.
Indeed, there has been a markets drastic change in expectations with
increasing bets in the Fed's rate-hike lift-off will be delayed once
again.
Just 19 of the 50 foreign exchange strategists polled are expecting
a rate hike in a few weeks, compared to all but four in the August
poll.
Still, only three analysts expect the Fed to delay to next year. The
remaining 28 are betting on this year, so either at the October, or
more likely the December meeting.
Reflecting that view, the poll of over 50 analysts taken this week
showed modest gains for the dollar against most major currencies.
But for the greenback's rally to continue, 34 of 53 analysts said it
was "important" U.S. rates rise soon, with 16 saying it was very
important. Only three analysts said "not important".
Jeremy Hale, head of global macro strategy at Citi, described the
dilemma for currency markets in a note to clients as a "Bullish Fed
in a Broken China Shop."
"In so far as the Fed tries to remain hawkish despite a fragile
China, the USD may still do better but other asset markets... likely
underperform - meaning weaker financial conditions overall and some
kind of limitation on Fed actions."
Currency speculators have slashed their bets in favor of the dollar
to their lowest since mid-June, according to data from the Commodity
Futures Trading Commission last week.
Meanwhile bets against the euro were cut to their lowest in over a
year and the yen shorts were squeezed.
The euro and the yen - both of which have been popular for funding
trades - gained over 4 percent in a span of 4 days at the end of
August.
Despite recent gains, the euro is down around 7 percent so far this
year, and is expected to weaken against the dollar to $1.10 in a
month from around $1.22 it was trading at on Thursday.
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It is then expected to weaken to $1.08 in three months and to 1.06
in six months. It is then forecast to trade at $1.07 in a year,
similar to last month's consensus.
If the consensus is realized, it would mark a second consecutive
year of losses for the euro, something not seen in the common
currency's history since its inception.
MORE QE
The International Monetary Fund said on Thursday ahead of a meeting
in Ankara including G20 finance ministers and central bankers that
the ECB should consider extending QE, citing building downside risks
to the global economy.
A majority of economists in a separate Reuters poll predicted the
ECB will eventually extend or increase its asset purchases.
Three-quarters said that the bank has simply run out of tools and
that ramping up QE, scheduled to run until next September, is its
only viable option.
Similarly, the Bank of Japan is expected to carry on with its
ultra-easy monetary policy. As a result, the yen is forecast to
weaken to 127.5 against the dollar in a year from Thursday's trading
level of around 120.3.
The timing for the first rate hike is not only in limbo for the Fed
but also for the Bank of England, which is expected to lift interest
rates from record lows early next year.
Sterling, which has remained relatively strong, is forecast to hold
steady against the dollar and trade at $1.54 in the coming year from
around $1.53 currently.
(Analysis and additional reporting by Hari Kishan; Polling by
Kailash Bathija and Krishna Eluri; Editing by Ross Finley/Jeremy
Gaunt)
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