By Sarupya Ganguly
BENGALURU, Feb 4 (Reuters) – The U.S. dollar’s recent recovery will be short-lived, holding steady before resuming a broader decline later in the year, a Reuters survey of currency strategists showed, as markets cling to interest rate cut expectations amid concerns about the Federal Reserve’s independence.
The dollar has fallen nearly 11% since U.S. President Donald Trump took office a little over a year ago, with his repeated calls for much lower interest rates and his recent expression of indifference to a weaker dollar accelerating a recent decline.
After Trump nominated former Fed governor Kevin Warsh as Fed chair on Friday, the dollar clawed back some losses as many interpreted the choice as likely to yield fewer rate cuts this year than other candidates for the job.
The euro is forecast to hold broadly steady at its current $1.18 level at end-February and $1.185 in three months, though there was little change among FX strategists in a Reuters poll taken between January 30 and February 4 on expectations of a weaker greenback over the medium-term.
DOLLAR LIKELY TO BE ‘CHOPPY’ FOR MOST OF YEAR
The six-month and one-year median euro forecasts of $1.20 and $1.21 respectively were the joint-highest levels in Reuters polls since September 2021, last matched in October 2025.
“For most of the year, including the next few weeks, the dollar is likely to be choppy,” said Jane Foley, head of FX research at Rabobank. “We still don’t think the market has fully put to bed concerns about Fed independence and credibility.”
Asked how the net-short dollar trade would evolve by end-February, all but two of 50 respondents said positioning would remain net-short, a view they have maintained since at least April last year.
Even with inflation running above 2% for nearly five years, the longest stretch since the early 1990s, interest rate futures traders are still pricing in two rate reductions this year.
DESIRE FOR LOWER RATES
The European Central Bank, meanwhile, is expected to keep its deposit rate steady all year.
“The administration has been very vocal about their desire for lower rates despite the fact inflation remains quite sticky and above target. Our concern is the Fed dismisses those upside inflation risks and potentially looks to cut policy even below what may be appropriate at the time,” said Alex Cohen, FX strategist at Bank of America.
“We see that risk pushing real interest rates lower, making the yield curve steeper and the dollar to continue to gradually depreciate over the course of the year.”
JAPANESE YEN PREDICTED TO RISE
The Japanese yen hit a near 18-month low of around 159/$ in January, but recently has come under renewed pressure following comments by Prime Minister Sanae Takaichi seeking voter support for higher spending and tax cuts, talking up the benefits of a weaker yen.
Japan holds national elections on Sunday.
While Takaichi later walked back her comments, worries linger that these mixed signals could hurt efforts to support a frail yen.
Still, FX strategists predicted the currency will rise about 4% to 151.33/$ in six months and to 148/$ in a year.
“Markets are clearly not keen on the Prime Minister’s policies. She has mentioned in a very Trump-like fashion the benefits of a weak yen in terms of being able to export more. But markets are very dubious about her credibility in terms of fiscal policy,” Rabobank’s Foley said.
Foley added that while Takaichi has offered some reassurance on the fiscal side, markets remain wary of higher spending potentially stoking inflation and prompting an already-hawkish Bank of Japan to accelerate interest-rate hikes.
“The yen should then have a counterbalance,” she said.
(Other stories from the February foreign exchange poll)
(Reporting by Sarupya Ganguly; Polling and analysis by Indradip Ghosh and Aman Kumar Soni; Editing by Hari Kishan and Ross Finley; Editing by David Holmes)
