Dollar Hits Two-Week High, but Strategists Remain Cautious on Future Strength

The U.S. dollar has reached its highest level in two weeks, but despite this rise, currency strategists are surprisingly bearish on the currency's future performance.

A Reuters poll conducted from August 31 to September 2 found that the euro is expected to trade at around $1.16 in three months, rising to $1.17 in six months, and reaching $1.18 within a year.

This is a change from last month's forecast, which saw the euro trading at $1.15 in three months and $1.16 in six months. However, 34 out of 66 FX strategists believe that the greater risk is that the dollar will trade weaker than their current three-month forecasts rather than stronger.

This discrepancy between market performance and strategist expectations may be due to doubts about the Federal Reserve's ability to tighten monetary policy as aggressively as markets currently expect. Citi's Dan Tobon pointed out that Fed repricing is a key variable for currencies over coming months, while BNY Investments chief economist Vincent Reinhart stated that the Fed is unlikely to deliver the amount of tightening priced into markets.

The stronger dollar has also become a risk for asset classes such as Bitcoin, which recently fell below $77,000 due to higher yields and Chair Kevin Warsh's hawkish message. However, geopolitics may yet change the outlook, with Citi's Tobon noting that a prolonged escalation of the U.S.-Iran conflict could invalidate bearish dollar forecasts.