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Too early for U.S. dollar sell-off despite Fed rate cuts: Reuters poll

By Hari Kishan

BENGALURU (Reuters) – The U.S. dollar’s strength will remain in place and for longer than expected just a month ago, despite Federal Reserve interest rate cuts intended to limit the economic damage from the spreading coronavirus, a Reuters poll showed.

The survey was conducted before the Fed cut interest rates by a half percentage point in an emergency move on Tuesday, after G7 finance officials said they were ready to use all policy tools to safeguard against risks to growth.

Many analysts had expected this reduction in the federal funds rate by 50 basis points to 1.00-1.25% to take place, only later this month at the Fed’s policy meeting.

Currency analysts in the Feb. 28-March 3 poll expect the dollar to sail through the current market crisis without shedding much of its strength. The dollar is up more than 1% so far this year, even though Wall Street is down over 4%.

A little more than half the analysts who answered an additional question, 25 of 45, echoed those views and said market expectations for Fed rate cuts were unlikely to halt the dollar’s strength.

A significant majority of analysts also forecast the currency would continue to dominate trading in the foreign exchange markets for at least another six months, a view held since the middle of last year.

“I think it might be a little early to assume that the dollar will sell off on Fed easing. It’s likely that other central banks will react, too, and that takes us back to where we were a year ago,” said Jane Foley, head of FX strategy at Rabobank.

“At the start of last year, when markets switched from anticipating Fed hikes in 2019 to expecting Fed cuts, markets also thought that the dollar would fall. But the dollar didn’t fall, and one of the reasons for that is we saw certain other central banks getting in there more aggressively than the Fed.”

If anything, the impact from the coronavirus outbreak would be felt more by emerging-market currencies. [EMRG/POLL]

The consensus from the latest poll echoed the long-held view the dollar will eventually lose its shine over the coming year, a majority prediction that has proved incorrect over the past two years.

Thhe euro has mostly been used as a funding instrument by traders over the past few years, but analysts have noted some recent strength against the dollar.

“Its not just about what central banks do, there is also an element of positioning adjustment as well … we’ve seen over the last week that there’s still scope for the euro and the yen short positions to be liquidated, and that feeds through to a further move higher for those currencies,” said Lee Hardman, currency economist at MUFG.

Still, despite the latest slightly better performance by the euro against the dollar, there has not been a dramatic shift in analyst expectations. If anything, there was a slight downgrade to median expectations.

The median forecast showed the euro was expected to trade at $1.14 in a year, about 2.5% higher than Tuesday’s $1.11, compared with the $1.15 predicted in the past three polls.

But more than half of the respondents in the latest poll expect the euro to trade lower than where it was on Tuesday over the next six months, with that number dropping to about one-quarter of them in a year.

There were considerably more pessimistic euro calls compared with the previous month.

That is largely driven by expectations the European Central Bank will be prompted to ease policy further to fight off any damage to the economy from the coronavirus outbreak, which is likely to hit the ailing Italian economy hard.

“Markets are going to be thinking: ‘Well, hold on a minute, if the Fed goes, what is the ECB going to do?’ In the near term, euro/dollar may be a little bit high, but I don’t think that’s going to sustain. I think even by the end of the week, that would have run its course,” said Rabobank’s Foley.

(Polling by Khushboo Mittal and Sumanto Mondal; editing by Ross Finley, Larry Kiing)