Currency guru Enrique Diaz-Alvarez of Ebury Partners backs dollar to climb in 2016

The dollar’s muted rally after the Federal Reserve’s first interest-rate increase in almost a decade leaves plenty of room for gains, says the No. 1 forecaster of the currency this year.

Enrique Diaz-Alvarez of Ebury Partners is among a minority of strategists who predict the dollar will strengthen beyond parity against the euro in 2016.

He said investors will have to catch up with the more-rapid pace of rate increases forecast by Fed policy makers, who held firm on Wednesday night projecting four quarter-point hikes next year.

“A lot of worries now are over the ability of the US economy to withstand the hikes in rates — there’s excess worry about that in the market,” said Diaz-Alvarez, chief risk officer in New York at Ebury, a London-based broker.

“There’s cause to call for a gradual leg down in euro-dollar in 2016.”

While most analysts correctly forecast the dollar’s 2015 ascent, Ebury, along with Barclays and Citigroup, are the few that correctly predicted at the start of the year that the currency would eventually strengthen beyond $1.10.

Ebury expects the dollar to extend its 12% surge this year.

Its call for the dollar to rally to 95 cents per euro by 2017 would mark a 47% gain since May 2014. Such gains would represent the most since the single currency debuted in 1999.

The dollar strengthened against the euro and yen yesterday.

That was in response to the Fed having raised its target for the federal funds rate to between 0.25% 0.5% on Wednesday night.

The decision came after months of signalling that the central bank was approaching lift-off.

It also adds to the allure of assets denominated in the US currency.

The Fed’s so-called dot plot, officials forecast that borrowing costs will rise to 1.375% at the end of 2016, implying four 0.25 percentage point moves.

Fed chair Janet Yellen said on Wednesday night that “economic activity will continue to expand at a moderate pace and labour market indicators will continue to strengthen.”

The market, as implied in Fed funds futures, are pricing in about two increases.

Historically, the euro-dollar pair has a strong correlation with short-term interest-rate differentials.

“There is still a disagreement between the dots and the market; data will tell who is right,” said Jose Wynne, head of foreign-exchange research at Barclays in New York.

“If the market gets convinced along the way that the US economy is in good shape, then the market still has to price in more hikes in the near term.”

That would spell good news for the dollar, said Mr Wynne.