Dollar may drop this year as global economy recovers from Covid, analysts say


Top line

The strength of the US dollar could start to decline for the remainder of 2021 as the US and global economies improve after the worst of the Covid-19 pandemic, according to a research note released on Wednesday by UBS and echoed by analysts who declared Forbes low interest rates in the United States and growing consumer and business interest in buying foreign products could dampen the greenback.


The dollar index DXY – a measure of the value of the US dollar against the currencies of the United States’ major trading partners, including the euro and the pound sterling – has climbed around 3.5% since the start of the year, after having fallen by about 7.1% last year.

The rise of the dollar has been accompanied by an almost doubling of the 10-year Treasury yield year-to-date – higher yields (reflecting optimism for higher U.S. economic growth rates and the likelihood of higher inflation) tend to increase demand for U.S. Treasuries from the foreign buyers whose domestic bonds in many cases offer lower or even negative returns.

But in a research note released Wednesday, Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote that he expects the dollar to decline this year – he believes the euro will equal $ 1.25. by the end of the year (compared to $ 1.18 currently); and the pound sterling will equal $ 1.49 by the end of the year (up from $ 1.38 now).

Haefele explained that the dollar is likely to fall against the euro as he expects economic growth to accelerate in Europe and elsewhere as “the pace of vaccinations picks up in the euro area.” noting that a “large-scale global recovery” generally supports the euro.

At the same time, Haefele noted that “robust” economic growth in the United States should benefit the currencies of foreign exporters and commodity producers, as their value is likely to appreciate against the dollar as “investors abandon safe investment. [of U.S. assets] and explore [assets] Outside the United States “

Haefele also said he expects the Federal Reserve to keep interest rates low for an extended period (low interest rates tend to push the dollar down as investors look for foreign currencies at higher yield).

Key context

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, said Forbes he also thinks the dollar rally will weaken this year as he doesn’t expect Treasury yields to rise much more. A stronger US economy, says Stoltzfus, typically hurts the dollar as more US businesses and individuals can buy foreign goods and assets, thereby increasing the value of currencies in exporting countries. “It’s already started to happen,” he adds. John Herrmann, U.S. rate strategist at Mitsubishi UFJ Financial Group, said Forbes that for the remainder of the year, either the pace of the dollar’s gains could likely slow down, or it could even reverse and decline – depending on the relative strength of the US and foreign economies. “Will the US economy and immunization programs continue to outperform on a relative basis, or will foreign countries ultimately change their handling of the pandemic and in so doing strengthen their economic prospects,” he said. offers. The Fed will also play a major role in determining the fate of the dollar. Brian Rose, senior economist at UBS, said Forbes the Fed is likely to keep rates close to zero until the end of 2023. [meaning the U.S. buys more imports than it exports] should hurt the dollar, ”he adds.

What to watch out for

Shahab Jalinoos, chief currency and rate strategist at Credit Suisse, said Forbes that profits generated by multinational exporters may be affected by a stronger dollar as this may make US exports less competitive and therefore hurt revenues, although aggregate world demand is a more important factor. The lower import costs are also a compensation. “We wouldn’t expect a significant impact on bottom lines one way or another when the US dollar is within plus or minus 10% of current levels… because those levels are not. not considered particularly cheap or expensive in the long run, “he added.

Surprising fact

While the dollar has been rising since the start of the year, the DYX dollar index is actually down about 6.8% over the past 12 months. “This indicates that the dollar had already started to weaken as the risk of a pandemic was perceived to be reduced by the scale of the American response and the anticipation of more effective vaccines to counter the spread of Covid-19”, a declared Stoltzfus.

Further reading

US Dollar Consensus Is Too Bearish (Forbes)

What “sustains” the dollar? Easy: Production (Forbes)

Could Bitcoin Replace the US Dollar? (Forbes)

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