USD looks set to perform in the coming quarters against most developed market currencies – CIBC

The US dollar is back in favor as the US economy will outperform on earlier re-openings and fiscal stimulus, according to economists at CIBC Capital Markets.

A few factors have changed over the past few months

“The Biden administration has passed an updated COVID-19 relief package and is now in talks on the most significant infrastructure bill in decades. That should support domestic demand in the months to come and lead to an outperforming US economy.”  

“The optimism on the real economy has led the yields at the long-end of the UST curve to climb relative to other sovereigns. Indeed, spreads have widened enough to offset FX hedge risks for investors outside of the US.”

“Optimism is leading investors in the futures market to bring forward the date for the first rate hike from the Fed. As the data continues to come in stronger, we expect that the USD will retain its residual bid tone.”  

“The big risk to this view is if the Fed continues to dig its heels in on the reflation narrative and insist that inflation spikes will be transitory in nature. Letting inflation get out of hand would be a negative for the greenback. But we’re trusting the Fed to read the signals of firming core inflation and wage indicators over the coming quarters, and alter its thinking on how long zero rates would be appropriate.”