As a measure of the dollar’s evolution in international foreign exchange markets, the dollar index accumulated a 3.6% gain in the first quarter of this year, reversing its previous downward trend for three consecutive quarters and becoming the best performance since 2018.
But the dominant voice on Wall Street remains bearish on the dollar.
A strong dollar
The yen rose 7.2% against the dollar in the first quarter of the year, with March being nearly the worst month for the yen against the dollar in nearly five years. In the same month, the euro fell the most against the dollar in three years, while the yuan fell the most against the dollar since March 2020.
But this is a headwind for Wall Street analysts who have been bearish on the dollar.
The strength of the dollar so far this year has puzzled analysts because their consensus in 2021 is that the dollar, the global reserve currency, should depreciate 3% amid a strong global economic recovery.
Their view.
An accommodative monetary environment in the U.S. and a strong global economic recovery will put pressure on the dollar by attracting corporations and investors to bet on overseas markets, dampening 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.
However, that consensus has 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. debt, pushing up yields, said Jim Leaviss, chief investment officer of M&G Investments’ public fixed-income unit, adding that U.S. debt yielding 1.6 percent has suddenly become attractive in markets such as Japan.
Two opposing forces
For the dollar trend, Deutsche Bank has adjusted its forecasts several times, a sign of a shift in the market.
George Saravelos, its head of global currency strategy, entered 2021 expecting the dollar to fall and the euro to rise to $1.25 against the dollar by June and $1.30 by the end of 2021. in mid-January, he said that “the risk in the coming months favors a stronger dollar” and by At the end of February, he said that it was time to sell the dollar again.
One reason the market is finding it difficult to judge the dollar’s movement is that there are two opposing forces driving it.
Zach Pandl, co-head of global foreign exchange, rates and emerging markets strategy at Goldman Sachs, stuck to the bank’s 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.
I do have some concerns about the near-term outlook …… but we are sticking with our bearish view because I think it is more likely that the dollar will weaken in the coming months.
Citi FX analyst Calvin Tse also maintains his bearish view on the dollar, believing it could fall as much as 20%.
In our view, the long-term outlook for the dollar has not changed. If the push for higher U.S. bond yields is driven by a faster-than-expected vaccine rollout, a recovery in global trade and commodity prices and better global growth, then the dollar could still weaken.
Some investors, however, believe that the dollar is being driven stronger as the U.S. economic recovery outperforms other countries, along with the nearly $1.9 trillion stimulus package launched by the Biden administration.
The dollar’s next move depends heavily 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.
Despite this, both bond and money markets are conservative about the Fed’s views on inflation, and money markets are already gearing up for a rate hike as soon as next year.
Recent Comments