The dollar dazzles with gains. A well-known bank says what's next
The dollar to zloty rate is approaching the level 3,80 PLN, driven by market confidence that the Federal Reserve may return to rate hikes before the end of the year.
The strengthening of the U.S. currency is backed by both its safe haven status and the jump in oil prices triggered by the U.S. and Israel attack on Iran at the end of February.
Recent agreements between Washington and Tehran, resulting from June peace talks in Switzerland, have partially eased financial market tensions, but have not allayed concerns about persistent high inflation.
As the President of the European Central Bank, Christine Lagarde, indicated, further monetary policy decisions in Europe will depend on incoming data and inflation outlooks.
In her view, with "appropriate actions" the inflation in the euro zone could fall from the current over 3% to the ECB target of 2%.
Analysts from Crédit Agricole do not rule out a continuation of the dollar's upward trend, emphasizing that further currency strengthening could occur soon.
"From recent client conversations it appears that more and more investors in the currency market are adopting an optimistic stance toward the U.S. dollar. Our data on investment positions also indicate that the U.S. dollar, already the largest long position in the currency market, has in recent days continued to attract buyer interest", they said.
"Consequently, most market participants agree that the recent rises in the U.S. dollar rate are fully in line with the market model USD-smile, which links better dollar performance with (1) higher U.S. rates and (2) sharp increases in risk aversion", they added.
Economists highlighted that the second factor above was further reinforced by the Fed's hawkish statement in June.
The U.S. central bank, for the first time under the leadership of Kevin Warsha, decided to keep rates unchanged.
"As a result, the U.S. dollar should continue to enjoy a good run in the near future," we read.
"With that in mind, we believe that consolidation of the euro to dollar rate in the near future will require positive economic surprises from Germany and hawkish comments from the ECB. We doubt that a significant rebound will occur until market participants remain reluctant to take risks, and U.S. rate markets continue to support their overly aggressive, hawkish expectations toward the Fed," added.
Chart. Probability of a change in U.S. interest rates by the Fed at upcoming meetings
Source: CME FedWatch Tool.
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Dollar and euro rates on Thursday, June 25
The dollar to zloty rate on Thursday, June 25 is at 3,77 PLN.
Chart. Dollar to zloty rate (USD/PLN)
Source: Trading Economics.
The euro to dollar rate reaches 1,13 USD.
Chart. Euro to dollar rate (EUR/USD)
Source: Trading Economics.
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