Trump-fueled dollar rally set to continue in the year ahead: Reuters poll

By Rahul Karunakar

(Reuters) – The U.S. dollar rally is likely to continue into the coming year on expectations that President-elect Donald Trump’s proposed reflationary economic policies will force the Federal Reserve to raise interest rates more quickly, according to a Reuters poll.

Most foreign exchange strategists also say risks to forecasts for the dollar to gain against every major currency are skewed to the upside. They see nearly one chance in three the euro will reach or fall below parity in the year ahead.

“(The dollar) continues to reign supreme on the back of bets of improving growth and the inflation outlook in the U.S. after Trump’s win,” said Valentin Marinov, head of G10 FX strategy at CA-CIB. “Investors continue to adjust their long-term rate hike expectations, anticipating a more aggressive monetary tightening cycle.”

In the months before the Nov. 8 election in the United States, most FX strategists polled by Reuters said the dollar would decline 2 to 3 percent immediately after a Trump victory. Instead, it rallied almost 4 percent to near a 14-year peak last week after being down about 1 percent for the year until then.

Expectations that tax cuts, infrastructure spending and reduced regulation will elevate inflation and lead to swifter rate rises have also pushed U.S. Treasury bond yields sharply higher.

The latest poll, taken this week of 65 strategists, forecasts the dollar index, which measures the currency’s value against a basket of six major currencies <.DXY> <=USD>, will rise a further 2 percent by the end of next year, after surging almost 40 percent over the last five years or so.

A majority of analysts who answered an extra question, 38 of 52, said risks to their predictions were skewed to the upside, echoing trader long positions.

The remaining 14 cited U.S. trade protectionism concerns and the inevitable drag a stronger dollar will have on exports and the broader economy.

“Further sustained gains would depend on U.S. data and the willingness of the Fed to tolerate persistent tightening in U.S. financial conditions, however,” added CA-CIB’s Marinov.

PARITY APPROACHING?

The dollar has risen beyond most of last year’s peaks against the euro to reach $1.0515 last week, with the March 2015 high of $1.0456 next on the way to parity.

Recent data out of the euro zone have been positive. But the euro, which had risen through much of this year, has weakened before Italy’s referendum on constitutional reforms on Sunday, also a test of Prime Minister Matteo Renzi’s political future.

A separate Reuters poll last week predicted the reaction to the outcome of the vote would be modest compared with the wild swings in financial markets after Britain’s vote to leave the European Union and the U.S. presidential election.

But a “No” vote may mean Renzi’s departure and could be taken as another sign of anti-establishment sentiment in Europe before a packed election year, possibly further eroding confidence in the currency union.

“The U.S. is not alone as it embarks on a new journey with a new, inexperienced leader,” wrote Jennifer Lee, senior economist at BMO Capital Markets in a note.

“Europe may also see a number of new leaders emerge next year, riding to victory on the shoulders of citizens who are on the same side of the migrant and sovereignty issues. This will create more worries about the future of the euro and the EU.”

Still, the latest poll predicted the euro would trade at around $1.06 in a month, about where it was on Thursday, and is expected to slip only slightly to $1.04 in six. Forecasts are it will then return to $1.05 in a year, weaker than last month’s consensus.

The poll also gave a median one-in-three probability of euro/dollar parity or below over the coming year, with the most pessimistic call at 90 percent.

The last time there was a similar one-in-three probability of euro parity was in April 2015. The European Central Bank had just started its asset purchase program, which had pushed the common currency to a 12-year low.

Since then, the ECB has spent over a trillion euros buying mostly government bonds and is expected to extend the 80 billion euros a month it is purchasing beyond March next year. [ECB/INT] [ECILT/EU]

The dollar is also set to make further inroads in the near term against the yen, which has nearly reversed all of this year’s gains since the U.S. election results. It is now forecast to trade around 114 against the dollar in a year, about where it was on Thursday.

(Additional reporting by Hari Kishan; Polling and analysis by Shrutee Sarkar and Sujith Pai; Editing by Ross Finley and Larry King)