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 Since December, investors have rushed into the euro and the Japanese
yen, considered safe havens, amid concern about slowing inflation,
low oil prices and lagging economic growth in China.
That and evidence the U.S. economy is slowing has turned the Fed,
which meets next on March 15-16, more dovish and helped narrow the
policy divergence between itself and global peers.
While the Fed is not likely to raise rates this month, economists
expect it will do so twice more this year. Markets are more
skeptical.
"2016 is not going to be another year of the dollar," said Sonja
Martens, senior FX strategist at DZ Bank. "There's a lot of
potential stumbling blocks. There's geo-political risks, there's
political, economic risks and many of these have the potential to
upset the market equilibrium at any time."
Data suggest some improvement in the world's largest economy, with
further evidence of a strong labor market likely to arrive on
Friday. But expectations for four increases this year are dwindling,
restraining the dollar's rise.
Even so, the dollar will strengthen from here, according to median
forecasts from a poll of 61 strategists taken this week, who have
trimmed their euro and yen forecasts considerably from last month
after both the currencies rallied in early February.
Those expectations come despite expectations the European Central
Bank will expand its quantitative easing program next week and cut
its already negative deposit rate. [ECB/INT] The Bank of Japan is
also expected to ease policy further sometime after June this year.
MILD VIEW
The latest trader positioning data from the Commodity Futures and
Trading Commision appeared to back analysts' milder views on the
dollar.
Investors were net short on the euro, net long on the yen and dollar
long bets were curbed for the ninth week to a roughly 22-month low.
Not long ago, euro-dollar parity was a popular call among
strategists. But not a single analyst now is calling for the euro to
breach parity with the dollar in the next six months.
Trading at $1.086 on Thursday, the euro is forecast in the poll to
weaken to $1.07 in three months, $1.06 in six months and drop to
$1.05 in a year from now. Forecasts have been raised from a month
ago.
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The ECB is expected to cut the deposit rate further, charging banks
more for deposits it holds overnight, to -0.4 percent from -0.3
percent and increase by 10 billion a month the amount it spends
buying mostly sovereign bonds. [ECB/INT]
But these policy moves aren't likely to weaken the euro much, adding
further credence to debates about the effectiveness of such policy
action.
"You don't get any lasting trends, you get overall a slightly weaker
euro because the ECB is expanding (policy) and the Fed is
tightening, but of course a lot of that is anticipated," DZ Bank's
Martens said.
"There is slightly negative euro/dollar bias but it's not as strong
as, say, the beginning of last year."
Investors will also be closely watching the BOJ's next move,
according to analysts, even though its surprise deposit rate cut in
late January had little impact on the yen, which rallied seven
percent the week after the policy was announced.
The yen , currently trading at 114.1 to the dollar, will slip to 116
in three months, 118 in six months and 120 in a year. It was trading
above 120 for most of 2015.
China's yuan, the source of most market turmoil since December, is
forecast to depreciate from 6.54 per dollar on Thursday to 6.70 in
six months and by 3.5 percent to 6.78 per dollar in a year. [CNY/POLL]
(Polling by Kailash Bathija and Shrutee Sarkar; Editing by Ross
Finley and Larr King)
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