US dollar's blistering rally to extend into next year, say analysts

Up over 16 per cent so far in 2022, the dollar index has already had its best year in at least five decades. PHOTO: REUTERS

BENGALURU - The unstoppable US dollar, which is already having a banner year, is likely to extend its dominance beyond 2022, according to a Reuters poll of foreign exchange strategists, who said the currency was still some distance from an inflection point.

Up more than 16 per cent so far in 2022, the dollar index has already had its best year in at least five decades, with the currency exhibiting few signs of slowing any time soon.

Underpinning the dollar's ascendancy were the United States economy's superior performance, the Federal Reserve hiking interest rates by 300 basis points this year - with more expected - and the role it played as a safe-haven currency.

With those broad narratives supporting the dollar well into next year, the greenback was likely to be well bid over the short to medium term.

An overwhelming majority of 85 per cent of analysts, 47 of 55, in the Reuters poll from Sept 30 to Oct 5 said the dollar's broad strength against a basket of currencies had not yet reached an inflection point.

When asked when it would be reached, 25 of 46 who responded said within six months and 17 said within three months. Among the remaining four analysts, three said within a year and one said over a year.

"We don't necessarily see a bigger turning point for the greenback until at least the second quarter of next year, when we think we will start to see potentially US fundamentals turn against the Fed's stance of restrictive policies," said Mr Simon Harvey, head of FX analysis at Monex Europe.

The dollar's extended rally is bad news for most major currencies, which have not only accumulated heavy losses so far this year but also surprisingly underperformed their emerging-market counterparts.

Nearly all major currencies - eight among the Group of Ten - that were down in double digits for the year were not expected to recoup their year-to-date losses over the next 12 months, the poll showed.

The euro, which was down 12 per cent for the year against the dollar and had largely traded below parity since August, was expected to stay there for at least another six months.

This was the first time in over two decades that median forecasts in Reuters polls had predicted the common currency to trade below parity over a six-month horizon.

Japan's yen, which hit a 24-year low of 146 against the dollar recently, was expected to recover some of its losses in a year.

The safe-haven currency was forecast to trade around 144.0, 140.5 and 135 per dollar over the next three, six and 12 months respectively.

If realised, that would amount to only about a 7 per cent gain against the dollar in 12 months for a currency that was already down more than 20 per cent for the year and the worst performer among majors.

Much of the weakness was down to the Bank of Japan sticking to its ultra-easy monetary policy when nearly every other central bank is moving in the opposite direction.

The British pound traded around US$1.12 on Wednesday, with the latest poll showing it would fall to US$1.09 in a month and be at US$1.10 in six months. It was predicted to be around 3.6 per cent stronger at US$1.16 in a year. REUTERS

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