Currency strategists see dollar rebound as short-lived, gradual weakening ahead

Global currency strategists view the recent recovery in the U.S. dollar as temporary, and expect it to weaken as the year progresses on concerns over the Federal Reserve’s independence and the prospect of rate cuts. They also said the Japanese yen is likely to rise more than 4% within six months.

According to a Reuters poll of currency strategists conducted between Jan. 30 and Feb. 4, published on the 4th (local time), respondents said the recent rebound in the U.S. dollar would be short-lived.

After President Trump last Friday nominated former Fed Governor Kevin Warsh as Fed chair, the market focused on his past hawkish leanings and the possibility that he could pursue quantitative tightening more aggressively than expected, pushing the dollar higher.

Dollar seen sliding amid volatility; euro gradually strengthening

Strategists said the dollar is likely to be volatile for most of this year but broadly remain on a weakening trend.

The euro is expected to stay broadly steady around the current level of $1.18 through the end of February, and to hover around $1.185 in three months. In six months and one year, the euro is projected to reach $1.20 to $1.21. That would match the highest level in Reuters surveys since September 2021.

Jane Foley, head of FX strategy at Rabobank, said, “I don’t think the market has fully put to bed concerns about the Fed’s independence and credibility,” adding, “The dollar will be volatile for most of this year.”

When asked about dollar positioning through the end of February, all but 2 of 50 respondents said net short positions would be maintained.

Even with inflation running above 2% for nearly five years—its longest stretch since the early 1990s—rates futures traders still priced in two rate cuts this year.

By contrast, strategists said the European Central Bank (ECB) is likely to keep its deposit rate unchanged throughout the year.

Alex Cohen, an FX strategist at Bank of America, noted that “even though U.S. inflation remains above target, the Trump administration has strongly demanded rate cuts.” As a result, he said, there are concerns the Fed could overlook the risk of rising inflation and cut rates to levels lower than would otherwise be deemed appropriate depending on conditions. He added that “this risk will steepen the Treasury yield curve further and gradually erode the dollar’s value over the course of this year.”

Japanese yen seen rising 4% within six months

The Japanese yen fell to around 159 per dollar in January, hitting its lowest level in nearly 18 months. It has recently come under renewed downward pressure after Prime Minister Sanae Takaichi, ahead of a general election, highlighted the benefits of a weaker yen in a bid to win voter support for higher spending and tax cuts.

Although Prime Minister Takaichi later walked back the remarks, such signals could undermine efforts to support the yen.

Even so, FX strategists forecast the yen will rise about 4% within six months to 151.33 per dollar, and climb to 148 per dollar within a year.

Rabobank’s Foley said, “The market is clearly not favorably disposed toward Prime Minister Takaichi’s policies.” She added, “The prime minister, in a manner similar to President Trump, has said a weaker yen helps boost exports, but is not trusted on the fiscal policy front.” She added that “the market is concerned that increased spending will fuel inflation and that the already hawkish Bank of Japan could accelerate rate hikes.”

Kim Jung-a, contributing reporter kja@hankyung.com