The U.S. dollar is expected to retain much of its recent gains for at least the next six months according to a recent Reuters poll of foreign exchange strategists, which also predicted the currency weakening in a year.
The dollar index has risen by more than 14 percent since the beginning of 2021, with about half of those gains coming in 2022. Most of the strategists polled by Reuters have for years maintained the view that the dollar would weaken. Expectations that the Federal Reserve would resort to the most aggressive monetary tightening in decades have pushed U.S. Treasury yields to their highest level in three years, which contributed to the strengthening of the dollar.
While analysts expect the dollar to keep its gains over the next six months, they still see the currency weakening over a period of 12 months.
The poll was taken between May 2 and 4, just before the Fed announced a rate hike of 50 basis points on May 4, the biggest increase in more than two decades.
The U.S. Dollar Index fell from 103.46 to 102.53 on May 4, the day of the Fed's rate hike. However, it snapped back up the next day, rising from 102.57 to 103.37 as of 11:58 a.m. coordinated universal time (7:58 a.m. Eastern time) on May 5.
“We think that the dollar strength induced by Fed tightening will last as long as the Fed doesn't start pushing back against market pricing in terms of (the) terminal rate," he said.
After the COVID-19 pandemic broke out in 2020, the Fed slashed its benchmark funds rate to a range of 0 percent to 0.25 percent. It also began to purchase bonds aggressively. During this time, Congress injected over $5 trillion of fiscal spending into the economy. These actions triggered a surge in demand as the economy reopened, also pushing up inflation.
Though the Fed initially dismissed inflation as “transitory,” it was later forced to raise interest rates for the first time in over three years in March 2022. The May 4 rate hike was the first consecutive increase since June 2006.
Collin Martin, a fixed-income strategist at Charles Schwab, said he was not surprised by the 50-point rate hike.