- Strategist at Ebury Partners sees parity with euro next year
- Market may align with Fed's 4 projected rate increases in 2016
The dollar’s muted rally after the Federal Reserve’s first interest-rate increase in almost a decade leaves plenty of room for gains, says the No. 1 forecaster of the currency this year.
Enrique Diaz-Alvarez of Ebury Partners Ltd. is among a minority of strategists who predict the dollar will strengthen beyond parity against the euro in 2016. He said investors will have to catch up with the more-rapid pace of rate increases forecast by Fed policy makers, who held firm Wednesday projecting four quarter-point hikes next year.
“A lot of worries now are over the ability of the U.S. economy to withstand the hikes in rates -- there’s excess worry about that in the market," said Diaz-Alvarez, chief risk officer in New York at Ebury, a London-based broker founded in 2009. “There’s cause to call for a gradual leg down in euro-dollar in 2016."
While most analysts correctly forecast the dollar’s 2015 ascent, Ebury, along with Barclays Plc and Citigroup Inc., are the few that correctly predicted at the start of the year that the currency would eventually strengthen beyond $1.10. Ebury expects the greenback to extend its 12 percent surge this year. Their call for the dollar to rally to 95 cents per euro by 2017 would mark a 47 percent gain since May 2014, the most since the single currency debuted in 1999.
The dollar strengthened against the euro and yen on Thursday after the Fed raised its target for the federal funds rate to between 0.25 and 0.5 percent a day earlier. The decision came after months of signaling that the central bank was approaching liftoff and adds to the allure of assets denominated in the U.S. currency.
The greenback gained 0.9 percent to $1.0811 per euro as of 2:39 p.m. in New York.
In the Fed’s so-called dot plot, officials forecast borrowing costs will rise to 1.375 percent at the end of 2016, implying four 0.25 percentage point moves after Chair Janet Yellen said “economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.” The market, as implied in fed funds futures, are pricing in about two increases. Historically, the euro-dollar pair has a strong correlation with short-term interest-rate differentials.
“There is still a disagreement between the dots and the market; data will tell who is right,” said Jose Wynne, head of foreign-exchange research at Barclays in New York. “If the market gets convinced along the way that the U.S. economy is in good shape. then the market still has to price in more hikes in the near term. That’d be dollar-positive.”
Ebury’s forecast at the beginning of the year was for the dollar to rally to $1.08 against the euro. Barclays and Citigroup called for an appreciation to $1.07. The median estimate was at $1.18, according to data compiled by Bloomberg.
Ebury said the dollar will strengthen to 99 cents per euro by June and to 95 cents by 2017. Barclays predicts the rally will peak at 95 cents by the end of 2016.
Citigroup’s Steven Englander agrees. The global head of Group-of-10 currency strategy said the policy divergence trade is back on with the possibility that the Fed will raise rates faster than expected. Confidence in that trade, among the most popular in the $5.3 trillion-a-day global foreign-exchange market, faded this month after the European Central Bank announced stimulus measures that were less aggressive than some investors anticipated.
“Janet Yellen was pushing that the U.S. economy was doing fine, that there is no reason to have the extreme pessimism that some have voiced,” Englander said on Bloomberg Television. “If you say look, that divergence trade, there is only one way for it to go. The ECB is not going to be more hawkish than we think, and the Fed is likely to.”