The US dollar has started 2021 on the front foot and, while economists at Capital Economics still think that it will eventually resume its downward trend, the risks around that forecast have shifted in favour of the currency.
Key quotes
“The dollar’s rebound is not all that surprising. The pace of its decline, especially since the start of November, was close to the fastest on record. And speculative positioning against the dollar is near record levels. This suggests the scope for it to fall further in the near-term is limited.”
“More than 10% of Americans have now received a first vaccine dose, a significantly faster pace of vaccine rollout than any other major economy aside from the UK. To the extent that this divergence continues, it could help the dollar rally further. And expectations about the relative pace of monetary policy normalisation in the US and the rest of the world might shift in favour of the dollar.”
“The yield of 10-year US Treasuries has jumped by about 25bp over the past month. And bond yields in other advanced economies have also risen, in some cases by even more. That probably reflects both optimism that vaccine rollouts will enable economic activity to return to something approaching normal later this year, and growing expectations that the Biden administration will implement a significant further fiscal stimulus package.”
“Currency performance has been closely linked to the relative changes in long-term government bond yields since the start of the year. The currencies of economies where yields have kept pace with those in the US have not lost much ground against the dollar. But the yen and the euro have suffered, as bond yields there have not risen much. Of course, this pattern may not last. But if US yields continue to edge up and those in Europe and Japan lag, that would challenge our forecast that the euro and the yen will appreciate against the dollar this year.”
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