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Lack of clarity on reforms to hold back dollar gains: Reuters poll

[June 01, 2017] By Hari Kishan and Rahul Karunakar

(Reuters) - The dollar will rise only slightly over the coming year on waning expectations for sweeping tax cuts and several rate rises from the Federal Reserve, according to foreign exchange forecasters who say the risks are skewed more to the downside.

After surging a little over 30 percent over the last five years, the dollar index -- which measures the currency's value against a basket of six major currencies <.DXY> <=USD> -- has fallen more than 5 percent this year.

Growing political tension in Washington over Donald Trump's presidency has raised worries of delays in the U.S. administration's efforts to implement sweeping tax cuts, and has pressured the dollar.

That was reflected in the latest Reuters poll of over 65 strategists taken over the past week, which showed only moderate further gains for the dollar in the year ahead.

Currency speculators too have cut their bets in favor of the greenback to the lowest since September, according to the latest data from the Commodity Futures Trading Commission.

"There is a lot of disappointment about the pace of reforms, tax cuts, regulation cuts in the U.S. and our view is that while the Fed can hike interest rates in June, they won't be able to hike interest rates again for the rest of this year," said Jane Foley, senior FX strategist at Rabobank.

"The concern is that Trump will have to spend a lot of energy in fighting off scandals and as such won't be able to push through with reforms. That suggests the expectation of the administration to achieve 3 percent growth is a long way off."

U.S. Treasury Secretary Steven Mnuchin repeated on May 23 that the economy will not be growing 3 percent this year or next. That was in line with a separate Reuters poll of economists published the week before. [ECILT/US] cpurl://apps.cp./cms/?pageId=best-polls

When asked about the risks to dollar predictions over the coming year, a big majority of strategists said it was skewed more to the downside.

At the beginning of the year, the view was the exact opposite. Back then, a large majority of strategists were convinced the risks were more to the upside.

The U.S. Federal Reserve is still widely expected to raise interest rates in June. But mixed U.S. economic data in recent weeks as well as the latest Fed minutes have helped to dial down some of the more hawkish policy expectations in the market.

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A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

EURO PROSPERITY NOT PARITY

Just as fading hopes on U.S. reforms have hurt the greenback, abating political risks after the French election result and a brightening economic growth outlook across the euro zone have pushed the euro more than 7 percent higher this year.

Bets in favor of the euro were increased to the highest in more than three years by speculators, according to CFTC data.

For several years, analysts predicted that the euro would reach or fall below parity with the dollar, but over the past few months, they have been abandoning that call.

Indeed, at the beginning of the year, almost a third of the poll participants were forecasting the euro to hit parity over the polling horizon but now there is only one strategist who predicts that to happen.

The latest poll consensus was for the euro to hold around the $1.1 it was trading at on Thursday in one, three, six and 12 months' time.

Preliminary data showed euro zone inflation eased by more than expected in May, supporting policymakers' views that only small adjustments should be made to stimulus and rates.

The risks to the euro over the coming year are not limited to concerns about a significant pick up in inflation.

National elections in Italy, expected to be held next year, are also seen as posing a big threat to the single currency as the anti-establishment 5-Star Movement is polling neck-and-neck with the ruling Democratic party at 30 percent.

"A potential downside factor is the Italian election. If that were to be brought forward from spring next year then it could clearly work against our forecasts," said Foley.

(Polling by Krishna Eluri and Sujith Pai; Editing by Catherine Evans)

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