The dollar rose 3.6% in the first quarter of this year.
Despite Wall Street’s bearishness on the U.S. dollar, the dollar index accumulated a 3.6% gain in the first quarter of this year, reversing a previous downward trend for three consecutive quarters and becoming the best performance since 2018.
The yen rose 7.2% against the dollar in the first quarter of the year; in the same month, the euro fell the most against the dollar in three years, and the yuan fell the most against the dollar since March 2020.
The strength of the U.S. dollar so far this year has puzzled analysts, whose view of the dollar’s movement in 2021 is that it should depreciate 3% as a global reserve currency against the backdrop of a strong global economic recovery.
Analysts believe that an accommodative monetary environment in the U.S. and a strong global economic recovery will put pressure on the dollar by attracting companies and investors to bet on overseas markets and curbing demand for the dollar as a safe-haven investment.
One of the biggest risks this year is that every sell-side report is saying the same thing, that the dollar will weaken, said Tim Ash, senior emerging markets strategist at BlueBay Asset Management.
Zach Pandl, co-head of global foreign exchange, interest rates and emerging markets strategy at Goldman Sachs, maintained his pessimistic view of the dollar, expecting the euro to reach $1.28 against the dollar by the end of the year, 10 cents above current levels.
Citi foreign exchange analyst Calvin Tse also maintains his bearish view on the dollar, arguing that it could fall by as much as 20%.
However, bearish psychological expectations of the dollar have been shaken by the sharp rise in inflation expectations, especially after the Biden administration launched a $1.9 trillion stimulus package.
The uptick in inflation expectations has triggered a recent sell-off in U.S. bonds, pushing up yields, said Jim Leaviss, chief investment officer of M&G Investments’ public fixed income division, adding that U.S. bonds yielding 1.6 percent have suddenly become attractive in markets such as Japan.
For the dollar trend, Deutsche Bank has adjusted its forecasts several times, becoming a sign of the market shift.
Some investors believe that with the U.S. economic recovery outperforming other countries, coupled with the nearly $1.9 trillion stimulus package launched by the Biden administration, has pushed the dollar stronger.
Analysts believe that the dollar’s next move will depend largely on whether the Fed will react to a more aggressive inflation outlook. Last month, the Fed pledged to tolerate climbing inflation and keep interest rates at near-zero levels until at least 2024.
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