By Sarupya Ganguly
BENGALURU (Reuters) -The U.S. dollar will weaken steadily over the coming months on mounting concerns over the Federal Reserve’s independence, the credibility of official statistics, ballooning fiscal debt and rising bets on interest rate cuts, a Reuters survey of foreign exchange analysts showed on Tuesday.
Underscoring those concerns, President Donald Trump’s dismissal of the Bureau of Labor Statistics commissioner last week over unproven claims of data rigging – following record downward revisions to job numbers – prompted a swift reversal of recent dollar gains from Trump’s tariff deal with the EU.
While there was a modest pullback from a crowded short-dollar trade, the greenback is still down nearly 9% this year against a basket of major currencies.
Trump’s erratic tariff moves, repeated attacks on the U.S. central bank and Fed Chair Jerome Powell and rising debt levels have made investors rethink holding U.S. assets and raised the term premium – compensation demanded for holding long-term debt.
Reflecting that sentiment, foreign exchange strategists, who have maintained a bearish dollar outlook since at least April, forecast in an August 1-5 Reuters poll that the euro would gain around 2% to $1.17 by the end of October and continue to rise to $1.18 in six months.
The euro would then rise to $1.20 in a year – the highest survey median since October 2021.
“We’ve been trading in this environment of U.S. exceptionalism and the U.S. being far and away the strongest economy in the world. That just isn’t the case anymore in my view,” said Erik Nelson, head of G10 FX strategy at Wells Fargo.
“There are underlying structural concerns – Fed independence, data quality, you name it. When it comes to the economic backdrop, all that is heading in the wrong direction. The temptation for the foreseeable future will be to sell the dollar on rallies.”
An overwhelming majority, 89 of 100 top policy experts in a separate Reuters survey, raised concerns over the accuracy of U.S. government statistics days before Trump fired BLS Commissioner Erika McEntarfer.
FED INDEPENDENCE
Investor nerves have been further frayed by Trump’s repeated attacks on Powell, who has so far resisted the president’s demands for steep rate cuts – and Fed Governor Adriana Kugler’s early resignation, potentially shaking up an already-fractious succession process for the Fed’s leadership. Powell’s term as Fed chief expires next May.
“For Trump to place one of his nominees as governor, who could then be elected Chair next year – I believe markets would take it quite poorly. Naturally, there will be a lot of scrutiny on how many members switch to the dovish side or whether they remain more cautious and fail to align with a new dovish Chair,” said Francesco Pesole, FX strategist at ING.
“Should markets interpret Fed independence as having been materially compromised, that would be quite a compelling argument for a weaker dollar.”
Interest rate futures are currently betting on roughly three Fed rate cuts by the end of this year, with the first move happening in September – a sharp increase from just the one or two reductions in borrowing costs anticipated weeks earlier. The European Central Bank is priced for just one cut or no cuts.
While a still-resilient U.S. economy and the risk of tariff-driven inflation have pared some of the dollar’s gains – net-short dollar positions had reached a two-year high in late June – the greenback’s slide may only slow but not reverse.
Over 60% of strategists, 26 of 42, expected dollar net-shorts in Commodity Futures Trading Commission positioning to either rise or hold steady by the end of October, the survey showed.
But a growing minority, over a third of respondents versus 17% in July, now predict a decrease in net-short bets.
“Short-dollar has been one of the most consensus trades this year, and most investors still expect long-term depreciation to continue. But near-term views have become less bearish, and therefore positioning is more likely to move towards fewer net shorts over the next few months,” said Jason Draho, head of asset allocation in the Americas at UBS Global Wealth Management.
(Other stories from the August foreign exchange poll)
(Reporting by Sarupya Ganguly; Polling by Indradip Ghosh and Mumal Rathore; Analysis by Jaiganesh Mahesh and Aman Kumar Soni; Editing by Paul Simao)
