Dollar set for further gains as Fed raises interest rates

The dollar has already rallied against global peers on growing expectations that the Federal Reserve will lift rates on Wednesday. JPMorgan expects the gains to last well into the new year.

"It feels like the market is probably already paying back a little bit of its long dollar positioning… We could potentially see a little bit of a dollar pullback but probably nothing beyond 1 percent in terms of the majors," said J.P. Morgan's head of EM Asia FX strategy, Jonathan Cavenagh.

There could be some profit-taking ahead of the year-end but any decline beyond 1 to 2 percentage points presents a buying opportunity, he said.

The bank anticipates the Fed to hike rates another four times next year driven by supply-side dynamics as unemployment and labor participants rate fall, driving wage growth and inflation.

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Higher interest rates should underpin the dollar as other central banks are more likely to provide additional stimulus.

Next year, there is upside for the U.S. dollar against Asian currencies with a "strong risk" of further devaluation in the Chinese yuan through 2016, said Cavenagh.

The house is forecasting a 4 to 4.5 percent weakening of the CNY against the USD. The yuan is currently trading at 6.46 against the dollar, near a four and a half-year low.

The Chinese central bank devalued the yuan in August to support flagging growth.

Other Asian currencies may face further downside risks if commodity prices weaken or countries face domestic headwinds, Cavenagh added.

"If you look at how the growth differentials between Asia and the rest of the world have been performing, they have generally been narrowing, so this is more about a reflection of what is happening in terms of the underlying fundamentals. Next year Asia is going to attract less capital inflows etc; places like the US and Europe are going to be more attractive."

Fed nerves weigh on 'crowded' dollar trade

Indeed, Morningstar's Asia equity research director Lorraine Tan said that the initial move from Fed anticipated on Thursday morning in Asia will "probably be a non-event" with the focus shifting to the speed and intensity of any further rate hikes next year.

"It's been well telegraphed; it's been well anticipated."

Tan expects the Chinese yuan to weaken against the U.S. dollar mainly due to strength in the greenback rather than a significant devaluation in the CNY.

Morningstar is expecting the USD/CNY pair to average 6.6 in 2016.

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