By Sarupya Ganguly

BENGALURU (Reuters) – The euro will weaken slightly against the U.S. dollar this month before strengthening through the end of the year, even as financial markets price in two more European Central Bank interest rate cuts by then, a Reuters poll showed.

The euro, which has generally underperformed analysts’ expectations in a Reuters poll over the past year, has fallen more than 1% since French President Emmanuel Macron announced a surprise early election on June 9.

The party subsequently gained only slightly as Marine Le Pen’s National Rally won fewer votes than some polls had initially predicted, despite having a clear lead after the first round of voting on June 30.

Still, the euro, which has fallen more than 2.5% against the dollar this year, could prove resilient amid rising political uncertainty in the European Union’s second-largest member state, according to a Reuters poll of currency strategists conducted between June 28 and July 3.

The median forecast for a possible decline this month was $1.06, or about 1.5% below Wednesday’s trading level.

“If it weren’t for the dynamics of the French election, we would have expected the euro to be much higher than it is now,” said Dan Tobon, head of G10 currency strategy at Citi.

“But given the polls and market expectations, we don’t see much downside left,” Tobon added.

The poll predicts the euro will strengthen in the three months and until the end of the year, although a separate poll predicted the ECB would follow up its June rate cut with two more cuts this year – in September and December.

The median forecast of nearly 80 currency strategists was for the euro to rise almost 1.5% to $1.09 by the end of this year and trade at $1.10 by the end of the first half of 2025.

In January, the euro was forecast to rise to $1.12 by the end of the year, but the resilience of the U.S. economy has since led financial markets to scale back expectations for a Federal Reserve rate cut, boosting the dollar.

Economists in a separate Reuters poll predicted two U.S. rate cuts this year but flagged one or even no rate cuts as major risks that could put pressure on the euro.

“Markets may be overestimating the Fed’s rate cuts and, in the short term, rate cuts elsewhere… There’s certainly a risk that the dollar strengthens more than we currently anticipate,” said Erik Nelson, macro strategist at Wells Fargo Securities.

The dollar has gained more than 4% against a basket of major currencies since January, defying expectations of weakness that prevailed earlier in the year.

The Japanese yen, which fell about 13% year-on-year on Wednesday to a 38-year low of 161.97 per dollar, will be the biggest gainer among major currencies, rising 6.5% to 152 by the end of the year, the survey showed.

Tokyo has so far relied heavily on market interventions to support the yen. But when asked what the authorities could do to stem the yen’s slide over the next three months, most analysts said the BOJ would have to raise interest rates sharply.

“The longer (authorities) wait to take action, the stronger the intervention has to be,” said Roberto Mialich, currency strategist at UniCredit.

(To read other articles from the July Reuters Foreign Exchange Survey, click here)