Dollar main beneficiary once Fed starts tapering - Reuters poll

Reuters

By Yati Himatsingka

(Reuters) - The U.S. dollar is the only currency that stands to benefit in the near-term once the Federal Reserve begins to pare back its massive bond buying programme, which it is expected to do this month, a Reuters poll found on Wednesday.

While most emerging market currencies have taken a beating since the Fed hinted in May at slowly reducing its $85 billion (54 billion pounds) in monthly purchases, the latest Reuters poll of around 60 strategists suggested other major reserve currencies will not rise much when it follows through with its plans.

Worries that the euro zone debt crisis has not been completely resolved, despite signs the bloc is on a path to a recovery from its recession, prompted most strategists to caution against further strength in the single currency.

That comes despite evidence that traders have been piling up long euro positions over the past several weeks - and to their highest since February, according to the latest data.

"We are positive on the dollar across the board, and that strength has already been seen in a quite convincing way against a lot of the more vulnerable emerging market currencies that operate with large current account deficits," said Tom Levinson, foreign exchange strategist at ING Financial Markets.

"But we increasingly think that over time as the Fed story evolves, the dollar will improve far more impressively against some of those stubbornly resilient major currencies, the yen, the euro, the Canadian dollar."

Forty-three of 54 currency watchers in the poll saw the dollar index (.DXY) higher in the near-term if the Fed announces a reduction in monthly stimulus at its September 17-18 meeting. Two said it will be unchanged and nine said it would be lower.

If the Fed is planning not to proceed with tapering its purchases this month, it has waited a long time to signal such intentions.

The last nine Reuters polls of forecasters taken since June have concluded it will start this month and U.S. Treasury yields have been rising in anticipation.

The dollar index was trading around a six-week high of 82.38 earlier on Wednesday as a recent raft of upbeat economic data have reinforced expectations the Fed will proceed.

The latest was positive news on U.S. manufacturing growth. And most forecasters expect further improvement in the jobs market to be revealed in data later this week, an area the Fed is watching very closely.

Commodity currencies such as the Australian dollar and the Canadian dollar are also expected to weaken.

Emerging market currencies, which have been pummelled by an exodus of funds that has triggered a round of interventions and monetary policy moves from Sao Paulo to Jakarta to prop them up, are expected to retreat even further.

The International Monetary Fund (IMF) said on Wednesday that emerging countries are at risk of slowing due to tighter U.S. monetary policy in a note prepared for the Group of 20 meeting in St. Petersburg.

And the outflow of capital from emerging markets will not give a significant boost to any other reserve currency. So far this year, the dollar has risen more than 3 percent against other major currencies.

The euro in particular is set to slip in the near-term, according to 39 of 54 forecasters in the poll.

"Greece is going to need another package, Portugal looks like they will need more money as well," said Benjamin Reitzes at BMO, referring to the likelihood of further international assistance for these cash-strapped euro zone countries.

"Those issues are going to come back and that is going to weigh on the euro so that is going to limit its upside even if you have money flowing out of the emerging markets into the euro," he said.

Median forecasts from the poll showed the euro at $1.30 in a month, $1.28 in three and $1.24 in a year from now, little changed from the August monthly survey. The euro was trading near $1.317 earlier on Wednesday.

However, not all forecasters are expecting the euro to fall.

Although currency speculators increased their bets in favour of the dollar, according to the latest data from the Commodity Futures Trading Commission, net long positions in the euro rose for the fourth straight week.

Whenever the Fed does begin to pare back its purchases, by how much it cuts them will also matter. The latest Reuters consensus is to trim them by $15 billion monthly to start.

"A lot depends on the amount of tapering," said Mitul Kotecha, global head of foreign exchange strategy at CA-CIB. "If the Fed only begins tapering by a small amount the impact on the currencies will be smaller."

(Polling by Anu Bararia and Sarbani Haldar; Additional reporting by Rahul Karunakar; Editing by Hugh Lawson)

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