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By Hari Kishan
BENGALURU (Reuters) - The U.S. dollar will weaken against most major currencies this year as the interest rate gap with its peers stops widening, putting the currency on the defensive after a multi-year run, according to a Reuters poll of foreign exchange strategists.
Despite starting the year on a weak footing, the dollar bounced back sharply in February, gaining nearly 3% for the month, on expectations the U.S. Federal Reserve would take interest rates higher than previously thought.
However, the failure of two regional U.S. banks in March forced the Fed to temper those expectations, pushing the greenback to retreat and give back nearly all of its previous month's gains, a trend likely to persist in the near-to-medium term.
While fears over market turmoil related to banks have subsided, hawkish interest rate expectations have not returned, suggesting a run of rapid rate rises may soon end, and with it, the beginning of the end of an historic dollar bull run.
Median forecasts in the March 31-April 4 poll of 90 foreign exchange strategists showed the dollar ceding ground to all major currencies in a year.
Highlighting the outsized role interest rates play in currency movements, a majority of analysts, 32 of 56, who answered a separate question said rate differentials will drive the dollar the most over the coming month.
"Our take on the dollar is that we continue to look for further weakness over the next three to six months. I guess recent developments have been the loss of confidence in the U.S. regional banks, which has increased downside risks to the dollar," said Lee Hardman, currency economist at MUFG.
"The Fed will be very aware of those downside risks to growth going forward. So we kind of agree with the dovish repricing that's taking place in the U.S. rate markets. We think the Fed is closer to the end of their hiking cycle."
Fed funds futures showed markets were pricing in a rate cut to come as early as September despite inflation still running well over double the Fed's target.
With the dollar's expected retreat, the European single currency is finding its spot in the sun after briefly crossing below parity on lagging rate expectations in 2022.
Up 2.5% this year, the euro was forecast to trade around current levels of $1.09 in the next one to three months and then strengthen another 2% to change hands around $1.12 in 12 months.
Despite gaining more than 2.5% in March, the Japanese yen is still down 0.6% for the year. The safe-haven currency, which hit 32-year lows in 2022 again on rate differentials, was forecast to recoup that loss over the forecast horizon.