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Dollar bull market to end as Fed tempers rate hikes: strategists

The U.S. dollar is expected to weaken against most major currencies in 2023, according to a Reuters poll of foreign exchange strategists.

Despite starting the year lower, the greenback rallied nearly 3% in February as Wall Street investors anticipated the U.S. Federal Reserve would take interest rates even higher.

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However, the collapse of two regional U.S. banks in March forced the Fed to reconsider the hawkish strategy, sending the U.S dollar in a downward spiral for the near-to-medium term.

Although market concerns over the banking crisis have receded, aggressive interest rate hikes are still tabled, implying the Fed is nearing the end of steep rate hikes while ending the bull run on the U.S. dollar.  

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Median forecasts in the March 31-April 4 poll of 90 foreign exchange strategists showed the dollar ceding ground to all major currencies in a year.

Highlighting the outsized role interest rates play in currency movements, most analysts, 32 of 56, who answered a separate question said rate differentials will drive the dollar the most over the coming month.

Fed Chairman Jerome Powell speaks during a news conference in Washington, D.C., on March 22, 2023. (Al Drago/Bloomberg via Getty Images / Getty Images)

Fed funds futures showed markets were pricing in a rate cut to come as early as September despite economic inflation still running well over double the Fed’s target.

Dollar versus euro, Yen

With the dollar’s expected retreat, the euro briefly crossed below parity with the dollar on lagging rate expectations in 2022.

Up 2.5% this year, the European single currency was forecast to trade around current levels of $1.09 in the next one to three months and then strengthen another 2% to change hands around $1.12 in 12 months.

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Despite gaining more than 2.5% in March, the Japanese yen is still down 0.6% for the year. The safe-haven currency, which hit 32-year lows in 2022 again on rate differentials, was forecast to recoup that loss over the forecast horizon.

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The median view showed the yen gaining nearly 6% to trade around 125.00 of the U.S. dollar in 12 months.

Reuters contributed to this report. 


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