Currency specialists anticipate the U.S. dollar will remain relatively stable in coming months before potentially declining later in 2024, according to a recent Reuters survey of financial experts who believe the Middle East conflict will conclude soon with only short-term effects on rising prices.
The three-month-old war has caused the dollar to fluctuate with market sentiment, gaining strength when fighting intensifies and dropping when hostilities appear to calm. Following an initial recovery period, traders now hold net positive positions, pushing the currency up approximately 2%.
However, Brent crude oil prices have surged more than 35%, a jump that threatens to drive up worldwide inflation rates. Warning signs are already emerging in America and the eurozone, where inflation has climbed to 3.8% and 3.2% respectively, significantly exceeding the desired 2% benchmark.
Government bond yields have increased substantially, and market predictions have eliminated earlier expectations of Federal Reserve interest rate reductions, instead suggesting rates may remain unchanged or even rise by year’s end. Multiple Fed officials have also adopted more aggressive policy stances.
Despite these concerns, average predictions from the May 29 to June 3 Reuters survey indicated the euro would climb roughly 2% to $1.18 within three months, $1.19 in six months, and $1.20 within a year, matching May’s projections.
“The driver of dollar weakness is a combination of ‘risk-on’ markets, optimism the conflict in the Middle East is going to end, and optimism that when it ends, we will not see significant or probably any tightening of U.S. monetary policy because the President doesn’t want that,” explained Kit Juckes, chief FX strategist at Societe Generale.
“That, and U.S. policymaking continuing to make global investors nervous about buying U.S. assets, is really what’s driving the status quo,” he continued, forecasting that any dollar decline would be short-lived.
Although the U.S. President has advocated for reduced interest rates, his selection for Fed chair may encounter pressure to maintain restrictive policies if warfare continues and inflation accelerates.
The European Central Bank is also anticipated to implement two rate increases this year, according to a separate survey.
While forecasters have traditionally expected dollar weakness, that confidence has diminished in recent months, with a substantial minority now projecting smaller decreases or even increases.
Experts noted that uncertainty is complicating longer-term predictions.
“The risks are much more for, at a minimum, a neutral bias, if not a hawkish bias from the Fed. There is a lot of uncertainty surrounding the war, and there are expectations some deal could be imminent, which could alleviate some of the pressure on oil markets,” stated Alex Cohen, FX strategist at Bank of America.
“But every day this goes on, the risks get greater and greater for higher oil prices and higher global inflation,” he continued, predicting some near-term dollar gains.
When asked about dollar positioning by late June, slightly more than half of strategists — 21 of 40 — anticipated minimal change. Only two predicted a return to net negative positions, while eight believed net positive positions would grow.
