By Sarupya Ganguly

U.S. Dollar Strength Forecast

BENGALURU (Reuters) – A crowded strong U.S. dollar trade is poised to become more concentrated in the coming months. Approximately one-third of currency strategists polled by Reuters now anticipate the euro to reach parity with the dollar or fall below it, compared to only one-fifth in the previous month.

The greenback has surged since late September, gaining over 7% against a basket of major currencies and driving the euro down to nearly $1.01 on February 3, close to parity, a benchmark last reached in November 2022.

Recent data from the U.S. Commodity Futures Trading Commission has shown numerous speculators engaging in bullish dollar trades, with net-long positions nearing a decade high last month.

FX strategists who participated in a February 3-5 Reuters survey largely expect this strength to continue. An 85% majority—40 of 47 respondents—believe that current positioning will remain stable or see net-long bets increase further by the end of February.

“The outlook for the dollar is bullish, primarily due to the escalating trade conflict. Our baseline forecast suggests the euro will test parity in Q1,” stated Meera Chandan, co-head of global FX strategy at J.P. Morgan.

Chandan highlighted that higher bond yields, strong U.S. economic growth, and a robust equity market have bolstered this forecast.

Ongoing U.S. economic strength and President Donald Trump’s potentially inflationary tariffs and tax-cut policies have tempered market expectations for additional cuts from the Federal Reserve, aiding the dollar’s gains.

“Beyond Q1, U.S. exceptionalism will likely fade, which should weaken the dollar in the long term, but the timing of this shift is uncertain,” Chandan added.

Some analysts have noted Trump’s unpredictable policy announcements, complicating financial forecasting—year-ahead euro estimates are among the most varied since May.

Market Sensitivity to Political Uncertainty

“We’ve witnessed how sensitive the market is to daily headlines amidst tariff uncertainty. Should a trade war escalate, it could lead to inflationary pressure and negative growth implications. Inflation is currently viewed as ‘political kryptonite,’” remarked Alex Cohen, FX strategist at Bank of America.

The latest survey indicated that near one-third of FX strategists—20 of 66—predict that the euro-dollar exchange rate will decline to parity or lower within their three-, six-, or twelve-month forecasts, signaling a significant shift towards dollar strength compared to January.

The median survey forecast expected the euro to stabilize at $1.03 in the next three to six months and increase by about 2% to $1.05 by the second half of the year. The lowest euro forecast of $0.97 also marks the weakest outlook in two years.

After years of consistently predicting dollar weakness, analysts have recently begun to indicate a reversal in their projections.

Nearly half of the economists anticipate that the euro, under pressure from ongoing expectations of further European Central Bank rate cuts, will trade weaker over the next six months than in the January survey.

Fed policymakers have also voiced support for a cautious approach to rate cuts, leading market expectations to price in just one more rate cut this year, casting doubt on a second—this contrasts sharply with last quarter’s bets for almost double the cuts.

“We’re currently in a scenario where the dollar is fully priced for positive conditions. Provided these factors remain unchanged, the dollar is unlikely to fall significantly. We expect volatility without clear direction,” noted Dan Tobon, head of G10 FX at Citi.

“Markets are unlikely to retreat significantly on the dollar now—tariff risks loom for the next few months, and outperforming U.S. growth should keep Fed policy more hawkish relative to other major central banks.”

(Other stories from the Reuters February foreign exchange poll)

*(This story has been corrected to accurately state Meera Chandan’s title as co-head of global FX strategy, not head of FX, in paragraph 5.)