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Regardless of the eventual consequences of the US Treasury’s decision to label Switzerland and Vietnam currency manipulators, strategists at Capital Economics think that there are good reasons why the US dollar will weaken against both the franc and the dong along with most other currencies over the next two years.

Key quotes

“The decision to label Switzerland and Vietnam currency manipulators is probably dollar negative. The SNB may become slightly less active in the FX market. And Vietnam’s authorities will probably allow the dong to appreciate a bit against the dollar to avoid further troubles. Regardless of what the Biden administration will actually do, though, we think that there are plenty of other reasons why the franc, the dong and most other DM and EM currencies will strengthen against the US dollar over the next two years or so.”

“The global economy is at the beginning of a recovery cycle, which has tended to favour risky assets and led the dollar to weaken across the board. We also think that China will allow its currency to appreciate a bit against the dollar as its economy continues to grow strongly. This would allow other Asian currencies to rise without significant loss of competitiveness.”

“Changes in yield differentials may also weigh on the dollar at the margin. We think that monetary policy in the US will remain accommodative for a long time, effectively anchoring US nominal yields at around their current levels. Meanwhile, we think that monetary policy will start to be tightened in some emerging economies, most notably in China.”