The U.S. dollar will continue to remain dominant as long as the Federal Reserve continues with its aggressive policy of raising interest rates and unloading bonds bought during the COVID-19 pandemic, says a poll of forex strategists by Reuters.
“We’ve got some aggressive tightening coming up this year from the Fed. We think the fed funds rate will probably hit 3 percent in the first quarter of next year, but [they could] even be cutting rates by the final quarter of 2023,” Chris Turner, global head of markets research at ING, said to Reuters.
“I think the dollar could hold onto its gains for a lot of 2022 … [and] we shouldn’t be starting to look for weakening in the dollar until perhaps, next spring-summer 2023.”
The U.S. dollar index has risen by four percent this year against other major currencies. Half of that increase came in March.
The strength of the dollar is being supported by statements from Fed officials who are calling for more rate hikes to the tune of 50 basis points and reducing the agency’s roughly $9 trillion balance sheet.
Minutes of the Federal Open Market Committee’s (FOMC) March policy meeting revealed that the agency intends to sell off $95 billion worth of assets from its balance sheet every month.
As a result of a strong dollar, investors are pouring money into dollar-denominated assets while Treasury yields are moving up.
Of the 53 analysts surveyed by the media outlet, 37 said that the dollar will stay strong for at least another three months. This included 17 experts who expect the U.S. dollar to be strong for six months. Of the remaining respondents, 13 expect the dollar’s strength to subside under three months, according to the poll results.
Though experts agree that the dollar will eventually give back its gains to other currencies, such a development will likely only occur after the Russia-Ukraine war tensions have settled down. The war has pushed up prices of energy and other commodities.
There are attempts to dethrone the dominance of the U.S. dollar in the global financial system, especially since the war in Ukraine. There is also a “fragmentation of payment systems,” Gita Gopinath, deputy head of the International Monetary Fund (IMF), said in a March 22 virtual discussion.
“We know that energy trade will never look the same again after this war. And we are likely to see some countries reconsidering how much they hold of certain currencies in their reserves. So, fragmentation is indeed an important concern,” Gopinath said.
China has the ability to “snap its fingers” and provide a counterweight to the U.S. dollar by pushing its own currency, Christopher Balding, an expert on the Chinese economy, said to The Epoch Times. However, Beijing will likely avoid it due to a simple reason—the communist regime is unwilling to give up control over its currency.
“There has to be global flows of the currency. China will not let that happen. They will not allow a global price to be set with free flows of the RMB. So, until China takes that political decision to allow that, there’s really nothing to discuss,” he said.