By Rahul Karunakar and Hari Kishan
(Reuters) - The euro is set to end 2017 higher against the dollar, a Reuters poll showed, with the risks skewed more in favor of the single currency, driven by expectations the European Central Bank starts to scale back stimulus.
Having lost almost a quarter of its value against the dollar over the last three years, the euro has gained more than 12 percent so far this year, making it the best performing major currency. (World FX rates in 2017 - http://tmsnrt.rs/2egbfVh)
While the poll of more than 60 foreign exchange strategists showed the euro will weaken slightly in the coming year from where it was trading on Wednesday, the currency is expected to close out 2017 higher than where it started the year.
The euro is forecast to trade at $1.16 in a month and at $1.15 in six months and hold at that level in a year, compared to a 2016 close of around $1.05.
Median predictions in August's survey were the highest since a January 2015 poll, the month when the ECB announced it would start buying bonds on a monthly basis and just after the Fed had raised interest rates for the first time in the current cycle.
But now, with the ECB widely expected to scale back its quantitative easing (QE) program, and as doubts have risen if the Federal Reserve will be able to raise rates again this year, the euro is expected to hold strong against the dollar.
"We were expecting the euro to do better, it certainly has gone beyond our expectations. The rotation back into the euro and the anticipation that there will be a tapering from the ECB is certainly a big factor," said Jane Foley, senior FX strategist at Rabobank.
"The ball is very much in the court of the ECB right now with respect to sending signals that could move the euro dollar."
Over three quarters of strategists who answered an extra question said a change in expectations for ECB policy will have a bigger influence on euro strength for the remainder of 2017 compared to a change in expectations for another Fed rate hike.
"A distinct and explicit shift to (ECB) 'taper' will probably have more impact than watered down Fed, given the likely dovish spill over to other central banks too," said Vishnu Varathan, economist at Mizuho Bank.
Forty-two of the 56 strategists who answered another extra question said risks to their euro forecasts were skewed more in favor of the single currency.
Predictions for euro/dollar parity or lower have vanished in recent polls after several forecasters had it penciled into their horizons at the beginning of 2017.
The euro has been bolstered by buoyant euro zone growth this year, outpacing its trading peers like Britain and the United States.
Not only has data out of the U.S. remained lackluster, the lack of political unity in Washington and fading expectations for any form of tax cuts from President Donald Trump has hurt the dollar dearly.
Currency speculators too have cut their bets in favor of the dollar, with net short positions in July built up for the first time in well over a year, according to the latest data from the Commodity Futures Trading Commission.
Currently, there is very little in favor of the dollar.
The currency should benefit when the Fed starts to shrink its balance sheet but if the central bank does not follow through on a predicted rate hike by the end of the year, it could weigh on the dollar further. [FED/R]
Any further dollar fall though will be limited as financial markets are assigning less than 50 percent chance for the Fed to raise rates at its December meeting.
"If the Fed does not raise rates this year, the euro would appreciate more than we currently expect," said Asmara Jamaleh, economist at Intesa Sanpaolo.
(Polling and analysis by Indradip Ghosh and Sujith Pai; Editing by Richard Balmforth)