By Shrutee Sarkar
(Reuters) - Economic and political turbulence in the euro zone will keep the euro under pressure in coming months, but currency strategists in a Reuters poll still say it will rally next year once the U.S. dollar's dominance fades.
The challenge, say strategists, is trying to predict when the dollar - which is being driven higher by an economy outperforming its peers and a central bank set to deliver several more interest rate hikes - will lose its shine.
The euro (EUR=) is forecast to rise over 2 percent to $1.16 ((0.89 pounds) in three months. But over 80 percent of strategists who answered an extra question said the risk to those predictions were skewed more to the downside.
A shaky outlook for the single currency is being driven mostly by weaker growth for euro zone economies and lingering concerns about Italy's fiscal management in a stand-off with the European Commission over its borrowing.
The 12-month outlook for the euro has held steady at around $1.20 in Reuters polls throughout this year on expectations the European Central Bank will shut its quantitative easing (QE) programme in December and raise interest rates in the second half of 2019.
But the U.S.-China trade war, which has already had a negative impact on economies across Asia, along with the not-insignificant risk of Britain leaving the European Union in five months without a deal has dented optimism.
The European Central Bank maintains it is on track to move away from super-stimulative policy toward something more restrictive. But that is being cast into doubt in markets, and along with it, conviction around how much the euro can rally.
"The near-term risks to euro zone growth have shifted to the downside – with both slower cyclical forces and political uncertainty both at play," noted Viraj Patel, foreign exchange strategist at ING.
"Investors should focus on the interplay between short-term macro data releases and politics; if the former remains resilient in the face of the latter, then any EUR/USD downside will likely be short-lived."
(For a graphic on 'risk to 3-month EUR/USD' click https://tmsnrt.rs/2RnI3un?eikon=true)
After the euro hit a 13-month low of $1.1297 in August, respondents were asked in October how low the single currency would go in the current quarter. The median was $1.14, but the euro fell well below that last month and weakened to $1.1299, very close to the August low.
"The European economy is slowing and while the ECB remains on course to end QE this year and raise rates in 2019, the foundations of a euro rally are being taken away brick by brick," wrote Kit Juckes, global head of FX strategy at Societe Generale (PA:SOGN), in a note to clients.
"We are in a $1.13-$1.18 range, the bottom of that range will be severely tested as growth slows, the Italian government sticks to its fiscal guns, and Brexit threatens to come off the rails."
Still, the single currency, which has weakened nearly 6 percent in 2018 so far, was forecast to pare those losses and gain about 8 percent to $1.22 in a year from around $1.13 on Wednesday.
That euro year-ahead prediction is also driven by expectations the dollar's strong footing will end next year.
With several factors that have helped the dollar rally expected to fade soon, most major currencies are forecast to gain over the next 12 months, a view held by strategists in Reuters polls this year.
That comes after the greenback recorded a seventh consecutive month of gains in October and its biggest monthly rising streak since April 2015. (Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh)
Against a basket of rivals, the dollar index (DXY) rose to 97.2 on Wednesday, its highest level since June 2017.
But the dollar index was forecast in the Oct 29-Nov 1 poll to fall to 92.5 by the end of next year.
While the U.S. economy is expected to continue to outperform its peers, a separate Reuters poll of economists taken last month showed economic growth will slow by the end of next year to half the latest reported rate of 4.2 percent. [ECILT/US]
(Polling and analysis by Sujith Pai and Manjul Paul; Editing by Chizu Nomiyama)