Dollar to gain ground as global economy cools

By Andy Bruce

LONDON, June 7 (Reuters) – The dollar looks likely to claw back some of its losses against the euro and yen over the next 12 months, boosted by fresh signs the global economic recovery is waning, a Reuters poll showed on Tuesday.

After plummeting more than seven cents against the dollar in the first half of May, the euro has surged more than 4 percent since May 23, boosted by expectations the European Central Bank will hike interest rates again in July.

It looks unlikely that rally will last, especially if forthcoming economic data entrench the view that the world’s global economic engines are cooling fast, which could see investors flocking back into the greenback, a traditional safe haven.

“The U.S. dollar remains beholden to the economy and rates, but also politics into mid-2011. Despite the market’s ‘natural’ negative view of USD, perceptions could quickly shift,” said Tim Riddell from ANZ.

In May, the dollar hit a new record low since the post-Bretton Woods era began in 1973, according to the Federal Reserve’s broad trade-weighted index.

While it has been hurt partially by expectations interest rates will rise elsewhere in the world before the Federal Reserve follows suit, political deadlock over efforts to cut the U.S. debt pile has also depressed dollar sentiment.

Still, the poll showed the standard dollar index finishing the year around 76.9, strengthening from current levels near 73.6.

While the euro has also been boosted over the last two weeks by expectations the European Central Bank will continue hiking interest rates as soon as July, the poll showed it giving up most of the modest gains it has made so far in 2011.

The survey of 61 analysts taken over the last week suggested the euro will depreciate slowly against the dollar — from current levels around $1.47 to $1.45 in one month, $1.44 in three, $1.40 in six and $1.38 in 12 months.

The findings were broadly similar to last month’s poll, with the exception of the one-month forecast that is 3 cents weaker than in May.

“We remain structurally bearish on the euro, although rate expectations should keep it supported in the short-term, until the USD recovers lost ground,” said Chris Walker from UBS.

Last month’s survey of foreign exchange strategists and economists predicted the euro would hit around $1.48, not too far off Tuesday’s level of $1.4675.

 

SHORT-TERM DOWNGRADE

Overall most contributors have downgraded their euro forecasts for the short term (one to three months) but kept their forecasts for the long term horizon (one year).

Only seven out of 59 analysts thought the euro would be stronger against the dollar 12 months from now.

“The widening interest rate differentials story should return to be the main driver for EUR-USD, pushing it back towards 1.50 in the medium term, although big swings are still expected in the near term,” said one of them, Roberto Mialich from UniCredit.

Economists polled by Reuters last week showed the European Central Bank holding fire on hiking interest rates again until July.

As in last month’s poll, analysts expected the yen to weaken towards 90 against the dollar over the next 12 months from current levels just above 80.

While the yen soared after March’s earthquake and tsunami that triggered a repatriation of yen funds, it has also gained from uncertainty about the U.S. dollar.

On Tuesday, Japanese Finance Minister Yoshihiko Noda said he was closely watching currency movements after the dollar slipped below the 80 yen mark.

Rising U.S. yields and the threat of government intervention to curb a strong yen should push the yen back to around 90, said Chris Walker at UBS.

On Tuesday the dollar sank to a record low of 0.8328 Swiss francs after the head of international payments at the Chinese forex regulator said the greenback would continue to weaken against other major currencies.

The survey suggested this would be temporary, with the poll showing the dollar at 0.88 francs in three months, 0.90 in six and 0.94 in a year’s time.

Darkening economic prospects in Britain mean the pound is unlikely to re-test its 2011 highs against the dollar, the poll showed, with sterling set to hover around the $1.63 mark for the next 12 months.

Overall, most analysts cut their cable forecasts across all the time horizons.