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Dollar to outperform other major currencies this year

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel
A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel

By Rahul Karunakar

BANGALORE (Reuters) - The dollar will easily outperform other major currencies in the coming year, according to foreign exchange strategists polled by Reuters, driven by demand for U.S. assets prompted by a shift in Federal Reserve policy.

After cutting its $85 billion of monthly asset purchases by $10 billion twice since December, the Fed has clearly signaled its intentions of closing its quantitative easing programme this year.

That initially led to a sell-off in emerging markets and has driven expectations for the Fed to raise interest rates in the second half of next year.

Wednesday's poll of over 60 analysts conducted March 3-5, showed the dollar set to gain against the euro, yen and sterling over the next 12 months.

"Real interest rates in the U.S. are going to rise and that is going to certainly decrease the (capital) flow outside of the U.S. into other economies," said Geoffrey Yu, a currency strategist at UBS.

"We have seen that trend in emerging markets already and are going to see it in other economies as well."

The poll showed the euro holding around $1.36 in a month's time, just shy of Wednesday trading level around $1.37. It is expected to weaken over the next year - to $1.34 in three months, and $1.28 in 12.

Similarly, the yen was forecast to hold near 102 per U.S. dollar in a month, and then weaken to 104 in three months and 110 in a year.

A fall in the yen to 110 per dollar in a year, as the poll predicts, would take the currency to a low not seen since the depths of the financial crisis in 2008.

DIVERGENCE

Analysts also attribute the broad dollar rally to the divergence in monetary policies in developed economies.

While calls for the Fed tightening its policy have increased, expectations are for the Bank of Japan and the European Central Bank to maintain an easing bias to support their economies.

Indeed, with euro zone inflation running well below the ECB's target of just under 2 percent, the central bank is under pressure to print money, something a separate Reuters poll showed a growing minority predicting.

"They (the ECB) have precious little ammunition left, but at the very least they will try and make as much dovish noise as possible," said Kit Jukes, head of foreign exchange research at Societe Generale, referring to Thursday's ECB rates meeting.

Over the past few years leading currency watchers as a group have repeatedly called for the euro to weaken, only to see it rise against the dollar.

However, if the ECB does ease in a substantial way by way of outright quantitative easing like its counterparts in other developed economies, that trend could reverse.

"There can be some justification for the euro strength like a reduction in risk premium and capital flows, but it probably has reached its peak and we expect it to weaken up ahead," UBS's Yu said.

The British pound was forecast at $1.66 in one month, and then to weaken to 1.65 in three and 1.62 in a year.

(Polling and analysis by Ishaan Gera and Hari Kishan Editing by Jeremy Gaunt)

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