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Over the past month, the US dollar has reversed most of its gains posted in the first quarter this year. The drivers of the FX market are steering towards expected policy normalisation but it is still a long journey. Economists at HSBC still expect modest USD weakness this year, but the greenback could outperform other currencies over the long run.

USD could outperform other currencies over the long run

“The belief that the global economy is gradually healing should imply that some future degree of monetary policy normalisation will eventually occur, which is then partly discounted by exchange rates today.”

“The Federal Reserve (Fed) is only willing to change to a more hawkish stance if the rise in growth and inflation turns out to be durable rather than transitory. Nevertheless, the volatility in recent activity data and noisy inflation base effects imply that this probably will not become clear until later this year.”

“As long as US fiscal and monetary stimulus is generating spill overs for the rest of the world, such that there is a synchronous global recovery, albeit at somewhat uneven speeds, the broad USD is to weaken modestly. The other thing to note is that vaccinations in other parts of the world are gradually catching up.”

“While the USD is seen underperforming for now, we remain mindful of the conditions that could see it regain its momentum and leapfrog other currencies over the long run.”

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