The US dollar index has already dropped close to 10% from its highs in March 2020, and economists at UBS anticipate renewed weakness in 2021. To position for this, investors should diversify across G10 currencies or into select emerging market currencies and gold.
Key quotes
“We expect continued large US fiscal deficits at the same time as US private sector savings are starting to fall, exacerbating external funding requirements. In addition, a recovering global economy and heightened focus on US indebtedness are likely to reduce safe-haven demand for the currency. And the interest rate advantage the US dollar previously held over other currencies in recent years has now eroded.”
“We see medium to long-term upside potential in the EUR, GBP, CHF and AUD against the US dollar. The euro is well placed to benefit from a recovery in global export demand as the pandemic fades and US stimulus boosts growth. We forecast EUR/USD to rise into the 1.20-1.25 range by end-2021. We also view the Swiss franc and the Japanese yen as superior safe havens to the US dollar, given that investors could become more concerned about the US’s indebtedness at the same time as the Swiss National Bank relaxes its interventions and as growth in Asia rebounds.”
“We like Asian currencies with a high yield, such as the Indian rupee and Indonesian rupiah, and those with cyclical exposure, such as the Singapore dollar and Chinese yuan. The yuan could additionally benefit from capital inflows as access to Chinese capital markets eases further. The low-yielding Taiwan dollar is our least preferred currency in Asia. Elsewhere, we think the Russian ruble will benefit from a global economic recovery, especially if oil prices increase, as we forecast.”
“Gold was one of the best-performing assets in 2020, rallying over 25%. In an environment of higher growth, we don’t expect last year’s gains to be repeated in 2021. But the precious metal can still act as a hedge against geopolitical uncertainty, while low rates keep the opportunity cost of holding it low.”
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