The US dollar is expected to remain sideways in the short term and weaken later this year, currency strategists said in a Reuters poll, driven by optimism that the Middle East war will soon end.
Since the conflict erupted three months ago, the dollar has followed market sentiment, rising when tensions escalated and falling as they eased. An initial rally on short-covering left traders net long, with the dollar up about 2%.
But Brent crude remains more than 35% higher, a move that will inevitably weigh on global inflation. The first signs are already visible in the US and the eurozone, where inflation has risen to 3.8% and 3.2%, respectively—well above the 2% target. Treasury yields have risen sharply, and interest rate futures have ruled out pre-war expectations of a Fed rate cut, now pointing to an extended pause or even a hike by the end of the year.
However, the median forecasts in a Reuters poll conducted from May 29 to June 3 showed the euro rising about 2% to $1.18 in three months, $1.19 in six months, and $1.20 in a year—unchanged from the May poll. “The driver of the dollar’s weakness is a combination of risk appetite, optimism that the conflict in the Middle East will end, and expectations that when it does, we won’t see much, if any, tightening of US monetary policy because the president doesn’t want it,” said Keith Juckes, chief currency strategist at Societe Generale. “That, plus the fact that US policy continues to make global investors nervous about buying US assets, supports the status quo,” he emphasized, adding that any dollar weakness would be temporary.
While forecasters have long expected the dollar to weaken, that belief has wavered in recent months, with a significant minority now forecasting a smaller decline—or even an increase.
“The risks are much more pointed to at least a neutral bias, if not a hawkish one, from the Fed. "There's a lot of uncertainty surrounding the war, and there are expectations that some kind of deal could be close, which would ease the pressure on oil markets," said Alex Cohen, currency strategist at Bank of America. "But with each passing day, the risks are moving more toward higher oil prices and higher global inflation," predicting some short-term dollar strengthening.
When asked about their dollar positioning by the end of June, just over half of the strategists (21 out of 40) expected little change. Only two foresaw a return to net short positions, while eight said net long positions would increase.