The US Dollar Index (DXY) has shed an outsized +12% since its mid-March peaks, its steepest decline over a nine-month period since 2011. Economists at Westpac expect the USD bear trend to extend in 2021 and forecast the DXY heading towards 88 in the first quarter of 2021.
Key quotes
“Interest rate differentials are the USD’s Achilles heel, and they are likely to remain decidedly less favourable. DXY-weighted 2yr bond spreads peaked close to 300bp in the USD’s favour in late 2018 but now stand at a skinny 50bp.”
“The Fed may have disappointed expectations by leaving the duration of their bond-buying unchanged, but flexible average targeting framework and their freshly minted forward guidance linking asset purchases to ‘substantial further progress’ will have much the same intended impact in capping yields, hindering any yield support that might otherwise emerge in the wake of a US recovery.”
“The US election crushed blue wave fiscal hopes, but Democratic wins in Georgia’s double Senate run-off races in early January and/or several moderate Republicans joining the fiscal cause could nudge the calculus back in favour of a major multi-year fiscal push. That would add yet more fuel to global reflation hopes in early 2021 and weigh on the USD Initially. But sustained fiscal support could change the USD outlook in late 2021 and beyond if it cements recovery momentum and brings forward Fed policy normalisation.”
“Sustained Fed accommodation, a less combative US-China trading relationship, near 10% GDP growth for China in 2021 and a distinct lack of political uncertainties on the 2021 calendar should continue to drag DXY lower into 2021. DXY is limping into year’s end and likely continues to trade on the back foot toward 88 in Q1.”
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