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Second waves of COVID-19 are set to stall USD depreciation through the first half of 2021. Therefore, economists at CIBC forecast the US Dollar Index (DXY) at 92.50 in the first half of the next year.

Key quotes

“With second waves of COVID-19 still spreading, USD depreciation could stall as its safe-haven currency status is restored into the early months of 2021. Indeed, the greenback will see inflows as the winter months prove particularly challenging in terms of keeping a lid on covid cases. It won’t be until closer to mid-2021 when mass vaccination starts to become a reality, and the USD unwinds gains. 

“A failure to pass a new stimulus bill could push the Fed into a more aggressive stance on QE, a potential negative for the greenback, but we’re assuming that a moderately scaled fiscal package will be approved by Congress in either December or soon after the January inauguration.”

“So far, the US economy has remained resilient, but it’s likely that the impact of the second wave reveals itself in the months ahead and in early 2021, as data is showing signs of turning. That could keep risk appetites contained and lift the USD. Progress on vaccine distribution towards mid-year could help shift the narrative to a risk-on environment, with the USD giving up any risk-off gains.”

 

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