Top Forecaster Is Biggest Dollar Bull on Outlook for Fed, Trump

  • PKO Bank Polski led Bloomberg rankings in fourth quarter
  • Pair may reach 95 cents ‘or even lower’ by June: PKO’s Kosaty

How the U.S. Dollar Is Setting Up Tighter Fed Policy

The world’s most accurate currency forecaster is also the dollar’s biggest bull.

PKO Bank Polski, which topped Bloomberg’s overall accuracy rankings for the final quarter of 2016, sees the dollar’s rise pushing the euro to 95 U.S. cents or even lower by the end of June, a level not seen in 15 years. That’s the lowest call for the pair among 53 forecasters, according to data compiled by Bloomberg.  

The forecast is based on the prospects of a tighter monetary policy from the Federal Reserve, coupled with markets expecting President-elect Donald Trump’s fiscal measures to “translate into higher growth and inflation,” said Jaroslaw Kosaty, the chief FX strategist at the bank, Poland’s biggest.

“We envisage a stronger dollar against not only the euro, but globally,” Warsaw-based Kosaty said. “I expect further dollar strengthening and a parity break in euro already in the first quarter, with a 0.99 level expected at the end of March. The dollar’s peak should come in the second quarter” when the pair could reach 95 cents or “even lower.”

The euro was at $1.0520 as of 1:04 p.m. in London, having dropped to $1.0341 on Jan. 3, the lowest level in 14 years.

Kosaty’s call for a stronger dollar is gaining ground. While traders see only an 18 percent chance of the euro falling below parity with the U.S. currency by the end of June, that’s more than double the 8 percent probability priced in before Trump won the U.S. elections in November, according to Bloomberg’s options calculator.  
 
For a story on an investor targeting parity, click here.

Of the 53 forecasters for euro-dollar, 11 banks see the pair touching $1 or falling below that level in the first half of the year.

Overall RankingFirmScore
1PKO Bank Polski65.49
2Westpac Banking59.60
3Mouvement Desjardins58.87
4Silicon Valley58.60
5Bank Julius Baer57.66
6DZ Bank56.81
7X-Trade Brokers Dom Maklerski56.58
8Rand Merchant Bank56.23
9St George Bank56.02
10Wells Fargo55.84

 

The dollar will likely falter in the second half of the year as the Fed would “start to tone down further rate-hike expectations” partially due to concerns about the strong currency, Kosaty said. He predicts the euro will end the year at 98 U.S. cents.

Among Fed officials still emphasizing the downside risks to the economy, some mentioned repeatedly the headwind created by an appreciating dollar, minutes of the central bank’s December policy meeting showed.

For a look at how a strong dollar could damage the global economy, click here.

David Kohl, head of foreign-exchange research at Julius Baer Group Ltd., agrees with PKO’s Kosaty that the dollar’s appreciation will slow in the second half of the year.

Kohl, whose bank was the most accurate forecaster for two consecutive quarters last year, predicts the euro will dip to about $1.03 in first half of 2017, before ending the year at $1.05.

He doesn’t see the pair touching parity as he expects the euro to gain support from a positive-growth backdrop in Europe and a chance that the European Central Bank will “scale back” its stimulus program. Kohl will reconsider this outlook if the ECB unexpectedly sticks to a “clear dovish stance.”

“The latest ECB decision was in the end quite dovish, quite expansionary because they prolonged the program. They surprised us already, we don’t think they will repeat that.”

— With assistance by Wei Lu

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