Why FX Strategists Still Expect the Dollar to Weaken

Most foreign-exchange strategists in a September 30–October 2 Reuters poll still expected the U.S. dollar to give back much of its recent gains over the coming year, even after a rally of more than 3% since early September. But the poll also showed near-term caution about betting against the dollar: 80% of respondents said it was more likely to outperform their three-month forecasts than to fall short. 3

That split is not necessarily a contradiction. A dollar can remain strong in the coming weeks while strategists still expect it to weaken over a longer horizon. The key uncertainties are how much further U.S. interest rates may rise, how long elevated yields and oil prices support the currency, and whether risks in Europe continue to weigh on the euro.

The euro forecast: gradual gains in the poll’s reported medians

A supplied account of the Reuters poll reports median euro forecasts of $1.14 in one month, $1.15 in three months, $1.15 in six months and $1.16 in a year. 6 These are forecasts, not observed exchange rates, and the exact figures come from a secondary account of the poll rather than the Reuters poll article excerpt available here.

Near-term risks could keep the euro below that path. Higher energy prices can hurt energy-importing economies, while concerns about France’s fiscal position and pressure in European bond markets have also weighed on the currency. Reuters reported that one strategist’s separate $1.16 three-month euro forecast was under review amid these risks; that individual forecast should not be confused with the poll median. 17

Why strategists can expect a weaker dollar over a year

The poll report says strategists made only minor revisions to their long-held weaker-dollar outlook despite the rally. It does not fully spell out each respondent’s reasoning in the available excerpt, so the case should not be reduced to a single explanation. 3

One rate-based argument is that markets may be pricing in more Fed tightening than forecasters expect. An earlier Reuters poll said strategists broadly expected the Federal Reserve to raise rates less than markets had priced in. 4 Separately, ABN AMRO described a similar gap between market pricing and its own rate forecast, arguing that a move toward its forecast would weigh more on the dollar than on the euro. 20 If markets eventually scale back expectations for U.S. rate hikes, that could remove support for the dollar—but it is a risk scenario, not a certainty.

What has supported the dollar—and what could change

Rising U.S. Treasury yields and expectations of further Fed rate increases supported the dollar during its September rally. Higher oil prices added to inflation concerns, while energy and debt worries in Europe put pressure on the euro. 217 The strength of those forces helps explain why the dollar could remain firm in the near term even as strategists retain a weaker longer-term outlook.

The data also showed how quickly rate expectations can shift. On September 30, a smaller-than-expected increase in U.S. inflation reduced market bets on a Fed rate hike. 2 After the September jobs report, traders put the probability of no change at the Fed’s October meeting at 76%, up from around 29% a week earlier. 11 Those changes tempered expectations for further tightening; they did not, by themselves, settle the dollar’s longer-term direction.

The main risk to the weaker-dollar view

The dollar’s near-term support could persist if oil-related inflation keeps U.S. rates and yields high. At the same time, European energy exposure and concerns about France’s fiscal outlook could continue to weigh on the euro. Reuters cited elevated U.S. yields, higher oil prices and fiscal concerns in parts of Europe as factors underpinning the dollar against the euro. 17

The clearest takeaway from the poll is therefore a time-horizon split: strategists largely held to a weaker-dollar view over the coming year, while most still saw a better chance of the dollar beating their three-month forecasts than missing them. The forecasts describe a prevailing outlook—not a confident prediction that the recent rally will reverse immediately. 3