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The key to a sustained USD recovery is whether there will be exceptional US growth and exceptional US monetary policy. The FOMC’s latest projections pointed to a stronger economy with higher inflation, but no rate hikes through 2023. Economists at HSBC still expect the USD to decline this year, albeit modestly.  

Key quotes

“If the global recovery is assured, cyclical currencies outperform in a cyclical upswing and can tolerate higher US Treasury yields. A lot of this may have played out but the process is not yet complete, in our view, and we see modest USD weakness this year.”

“The median of the FOMC economic projections pointed to a stronger US economy with higher inflation, but no rate hikes through the end of 2023. Nevertheless, markets still expect the Federal Reserve to start raising the policy rate, possibly at the end of 2022. In our view, if market hawks wobble, so too could the USD eventually, not least because risk appetite might be newly energised by the Fed’s inaction. Conversely, if market stress intensifies, a circuit breaker may be reached and the Fed may need to adjust policy that causes the USD to then soften.”

“All in all, we believe the new-found fondness for the USD so far in 2021 after a troubled 2020 appears to be premature.”