Further dollar rally hinges on Fed hiking rates soon: Reuters poll

(Reuters) - The U.S. Federal Reserve will need to raise interest rates soon if the dollar is to push much higher, according to a Reuters poll of foreign exchange strategists.

The dollar's 18-month surge came to an abrupt halt late last month when it lost 3 percent in just under a week during the widespread financial market sell-off on China-led global growth concerns.

That market rout sparked a rally in the euro, pushing it back up toward the levels it was trading at before the European Central Bank launched its stimulus program in March.

Recent euro strength and a sharp fall in commodity prices will probably push the ECB to cut its inflation outlook on Thursday and also promise to beef up its 60 billion euro monthly bond-buying program, if the outlook worsens further.

Wild swings in world stocks, commodities and currencies has pushed many to suggest the Fed may not raise rates this month after all. Indeed, there has been a markets drastic change in expectations with increasing bets in the Fed's rate-hike lift-off will be delayed once again.

Just 19 of the 50 foreign exchange strategists polled are expecting a rate hike in a few weeks, compared to all but four in the August poll.

Still, only three analysts expect the Fed to delay to next year. The remaining 28 are betting on this year, so either at the October, or more likely the December meeting.

Reflecting that view, the poll of over 50 analysts taken this week showed modest gains for the dollar against most major currencies.

But for the greenback's rally to continue, 34 of 53 analysts said it was "important" U.S. rates rise soon, with 16 saying it was very important. Only three analysts said "not important".

Jeremy Hale, head of global macro strategy at Citi, described the dilemma for currency markets in a note to clients as a "Bullish Fed in a Broken China Shop."

"In so far as the Fed tries to remain hawkish despite a fragile China, the USD may still do better but other asset markets... likely underperform - meaning weaker financial conditions overall and some kind of limitation on Fed actions."

Currency speculators have slashed their bets in favor of the dollar to their lowest since mid-June, according to data from the Commodity Futures Trading Commission last week.

Meanwhile bets against the euro were cut to their lowest in over a year and the yen shorts were squeezed.

The euro and the yen - both of which have been popular for funding trades - gained over 4 percent in a span of 4 days at the end of August.

Despite recent gains, the euro is down around 7 percent so far this year, and is expected to weaken against the dollar to $1.10 in a month from around $1.22 it was trading at on Thursday.

It is then expected to weaken to $1.08 in three months and to 1.06 in six months. It is then forecast to trade at $1.07 in a year, similar to last month's consensus.

If the consensus is realized, it would mark a second consecutive year of losses for the euro, something not seen in the common currency's history since its inception.

MORE QE

The International Monetary Fund said on Thursday ahead of a meeting in Ankara including G20 finance ministers and central bankers that the ECB should consider extending QE, citing building downside risks to the global economy.

A majority of economists in a separate Reuters poll predicted the ECB will eventually extend or increase its asset purchases.

Three-quarters said that the bank has simply run out of tools and that ramping up QE, scheduled to run until next September, is its only viable option.

Similarly, the Bank of Japan is expected to carry on with its ultra-easy monetary policy. As a result, the yen is forecast to weaken to 127.5 against the dollar in a year from Thursday's trading level of around 120.3.

The timing for the first rate hike is not only in limbo for the Fed but also for the Bank of England, which is expected to lift interest rates from record lows early next year.

Sterling, which has remained relatively strong, is forecast to hold steady against the dollar and trade at $1.54 in the coming year from around $1.53 currently.

(Analysis and additional reporting by Hari Kishan; Polling by Kailash Bathija and Krishna Eluri; Editing by Ross Finley/Jeremy Gaunt)