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The dollar is down but not out: Analysts
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Loading...The dollar may have come off the 14-year highs it's touched recently, but the greenback rally will likely soon catch a second wind, analysts said.
The dollar index, which measures the greenback against a basket of currencies, climbed as high as 103.82 at the beginning of January, but has since slipped as low as 99.233. The dollar index was trading around 95 at the beginning of October.
In mid-January, then President-elect Donald Trump told the Wall Street Journal that the U.S. dollar was "too strong," in comments considered unprecedented for a president, with some analysts describing the effort to jawbone down the greenback "extreme."
The dollar strength was at odds with Trump's stated goal of building up the American manufacturing base, because a strong dollar makes exports more expensive for foreign buyers.
Other developments since then, such as a politically unpopular effort to ban travellers from seven Muslim-majority countries, as well as a series of tweets from Trump have also appeared to weigh on the greenback.
Those comments put the kibosh on the strong dollar trade. But analysts don't expect the dollar weakness to last.
"President Trump can tweet all he wants but many of his policies are fundamentally supportive of the U.S. dollar," Tai Hui, chief Asia market strategist at JPMorgan Asset Management, told CNBC's "Squawk Box" on Monday.
"If you think about protectionism, if you think about immigration policy, if you think about his pro-growth fiscal policy, all of these are supposed to raise inflation and therefore raise interest rates and supposedly raise the dollar."
Hui said he expected the dollar was consolidating after running too far, too fast in the fourth quarter of the year.
Other analysts also expected the dollar would resume its cliamb.
Patrick Bennett, a foreign exchange strategist at CIBC, told CNBC's "Squawk Box" on Monday that he was expected the dollar would stay strong, pointing to the performance of the U.S. economy.
On Friday, data showed that U.S. nonfarm payrolls grew by 227,000 in January, above a Reuters poll forecast for 175,000, although the unemployment rate edged up to 4.8 percent, compared with 4.7 percent expected.
A solid economic performance was likely to perk up the U.S. Federal Reserve's tightening cycle.
"The Federal Reserve will be raising rates further this year. We think the market probably underprices what the Fed is going to do," Bennett said.
The bank also pointed to another factor that might slow the central bank's hiking path: "Trump tweets put many on edge and the uncertainty is bound to translate into a more cautious Fed."
For the U.S. dollar to resume appreciating in the near term, markets would need to bring forward the forecast for the next rate hike to March from June, DBS said.
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