Dollar to stay firm on expectations of resilient US economy

BENGALURU, July 6 (Reuters) – The US dollar will hold its ground against most major currencies for the rest of the year despite expectations of narrowing interest rate differentials as the US economy stays resilient, according to FX strategists polled by Reuters.

Although the greenback is still down around 0.5% against major currencies this year, it has gained nearly 1.3% over just the past week thanks to receding calls for a federal funds rate cut and wilting expectations for a US recession this year.

Several US Federal Reserve officials, including Chair Jerome Powell, have argued in favor of at least two more rate hikes, against market expectations of one more, which also helped underpin the currency.

The dollar will not give up those recent gains anytime soon, according to the June 30-July 5 poll of 80 FX strategists despite some major central banks, like the European Central Bank and Bank of England, set to keep raising rates for longer.

“The tightness of the US labor market may help the economy and the dollar in the very short term,” said Kit Juckes, chief FX strategist at Societe Generale. “Even if we see (interest) rate convergence, it seems unlikely a new major euro uptrend will start without stronger growth.”

Indeed, a majority of common contributors showed the dollar view against most major currencies for the coming six months has been either upgraded or kept unchanged from a month ago.

Meanwhile, net USD short positions have eased since hitting a two-year high in May, according to data from the Commodity Futures Trading Commission.

Recent data showed the world’s largest economy has remained stronger than expected and has fared better than the euro zone, which slid into a recession earlier this year.

“We see room for a dollar rebound in the near term. The US economy looks in better shape than Europe and Asia, which suggests ‘higher for longer’ is somewhat more credible coming from the Fed than most others,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.

After rising over 2% in June, the euro, currently at USD 1.09, was expected to gain a little less than 1% and trade at USD 1.10 in six months.

Sterling, one of the best-performing G10 currencies this year, was forecast to change hands at USD 1.26, slightly lower than the current level of USD 1.27.

A double whammy of high interest rates and sticky inflation has already dragged on economic activity in Britain.

When asked how the dollar would perform against major currencies over the next three months, 45% of strategists, 27 of 60, said it would remain rangebound and 19 said it would strengthen. Only 14 said it would weaken.

“The dollar is getting a tailwind from the Fed … the current strength is on a repricing of the Fed (rate) higher,” said John Hardy, head of FX strategy at Saxo Bank.

“But at the same time, we have extremely strong global risk sentiment and liquidity and financial conditions are very easy. That normally associates with the dollar weakness. Those two things are balancing each other out.”

(Reporting by Indradip Ghosh and Shaloo Srivastava in Bengaluru; Polling by Sarupya Ganguly, Anitta Sunil, and Veronica Khongwir; Editing by Hari Kishan, Ross Finley, and Matthew Lewis)