Fed's policy action to drive euro over coming year, not Greece - poll
By Rahul Karunakar
(Reuters) - The pace and timing of U.S. Federal Reserve interest rate hikes will continue to be the prime driver of where the euro trades in the coming year, not what happens to Greece, a Reuters poll of foreign exchange strategists found.
Greece's euro zone membership is at risk after defaulting on its debt to the International Monetary Fund on Tuesday and as Prime Minister Alexis Tsipras has urged Greeks to reject a now-expired aid-for-reform offer at a referendum on July 5.
Still, Thursday's poll of over 60 analysts showed the euro -- which has lost over 8 percent against the dollar this year -- will end July near its current level of around $1.10.
That suggests uncertainty surrounding Greece has already been priced into the euro. Indeed, 40 of 46 analysts said the latest developments in Greece have not altered their euro forecasts for the coming year.
But with the Fed expected to raise interest rates in September and the European Central Bank buying 60 billion euros of bonds a month, the euro is forecast to shed around 5 percent in six months to $1.05 and trade around that level in a year.
"The Greek Referendum will drive headlines for the near-term. We believe that divergence of monetary policies is a more powerful euro driver than Greek risks," wrote David Woo, FX and Rates Strategist at BofA-ML.
"In this context, the timing of the first Fed rate hike -- September is our call -- and the ECB's tone are more important for the euro than Greek headlines."
Although the common currency is expected to weaken in the coming year, the latest consensus was more subdued than just a month ago and the number of analysts calling for the euro to reach parity or below was down compared to previous months.
That was largely driven by analysts' expectations for the dollar's strength to be more measured going forward. Outright bets by speculators on either the dollar or euro haven't moved much over the past few weeks either.
The dollar has had an almost uninterrupted run of gains against most currencies over the past year on expectations the Fed will raise interest rates this year.
But dollar strength, which has been one of the main reasons behind disappointing data since the beginning of this year, has pushed the Fed to reassure markets the path of rate hikes will be slow and gradual.
"The high point of the dollar is going to be towards the end of the year, post which the Fed will turn up the rhetoric around the dollar itself and so we expect all the other currencies to gradually improve through 2016," said Nick Parsons, global co-head of foreign exchange strategy at NAB.
Similar to the Fed, the Bank of England is expected to raise interest rates from record lows early next year. [BOE/INT]
The British pound was predicted to hover near its current trading level of $1.56 in a month, $1.52 in six months and $1.51 in 12 months, a tad stronger than the predictions in June.
Greenback strength is also likely to weaken the Japanese yen slightly to 126 in six months and to 127 in a year. That is almost unchanged from June's poll but is weaker than Thursday's trading level of 123.45 yen.
(Additonal reporting and analysis by Hari Kishan and Kailash Bathija; Polling by Krishna Eluri and Khushboo Mittal; Editing by Toby Chopra)
