Over the past two years, the dollar has staged a dramatic rally against the mark and yen. Last week alone, it surged to a 55-month high of 127.17 yen and a 37-month high of 1.7276 marks.
Behind its gains have been two assumptions: that US growth will outstrip German and Japanese growth and that central banks from these countries are comfortable with the dollar's rise and won't act to reverse it.
While both expectations still influence investor thinking, the dollar is expected to fall back and close the second quarter at 1.7070 marks and 122.8 yen, according to the consensus view of 66 analysts and traders polled by Bloomberg News.
"I don't expect the dollar to just keep rising this year as it has done," said Tetsuhisa Hayashi, treasury manager at Bank of Tokyo-Mitsubishi in Tokyo. "The higher the dollar rises, the deeper it could dive."
Forecasts of where the dollar will trade at the end of the second quarter ranged between 113 and 130 yen. Against the mark, it is expected to trade somewhere between 1.59 marks and 1.80 marks. This 21-pfennig range is the largest in a year.
That's what analysts say. They could, of course, be wrong.
When Bloomberg asked some of the same analysts at the end of 1996 how the dollar would fare in the first quarter of 1997, the consensus was the US currency would fall 1.2 per cent to 114.4 yen and close little changed against the mark near 1.5551 marks.
In fact, the dollar ended the quarter up 7 per cent at 124 yen and up 8.8 per cent at 1.68 marks.
The market watchers who came closest to getting that right were UBS, Merrill Lynch, Tokai Bank, NationsBanc-CRT and Sakura Bank, all with average margins of error below 3 per cent. Kleinwort Benson, Bear Stearns, Lloyds Bank and Nikko Europe were widest of the mark, all with average margins of error in excess of 7 per cent.
Earl Johnson, Bank of Montreal/Harris Bank's international economist, is among the market watchers who are less optimistic about the dollar's outlook in the second quarter.
"The contrast between the economies of the US and Germany and Japan is greatest right now," he said. But the coming months will show "slower growth in the US and faster growth in Germany and Japan".
The pick-up in Germany is also expected to take its toll on the pound, which has benefited in the past three quarters from the disparity between UK growth and the sluggish recovery in continental Europe.
Expectations that interest rates will rise from 6 per cent soon after the general election is seen as offering the pound little support.
Sterling is expected to slip to 2.7270 marks by the end of the second quarter, down 0.55 per cent from the end of the first quarter and almost 3 per cent below the four-and-a-half year high of 2.8038 marks it leapt to late last week.
It is, on average, expected to fall 2.3 per cent from the end of the first quarter to $1.5980 by the end of June. Copyright: IOS & BloombergReuse content