International economic outlook: June 2021

Summary

Forecast Changes

• Our view remains that the U.S. dollar will weaken over time as Fed monetary policy settings remain unchanged for the time being. However, a more hawkish Fed "dot plot" tilts risks around our view toward a more resilient U.S. dollar than we currently expect.
• As far as G10 currencies, we remain broadly constructive; however, we have become slightly less positive on the euro. On the other hand, we have a slightly more favorable outlook for the Norwegian krone as higher oil prices and a more hawkish central bank should contribute to a stronger currency over time.
• In the emerging markets, our views are consistent with last month. We continue to believe currencies associated with hawkish central banks and exposed to higher commodity prices can outperform. Our top emerging market currency recommendations are the Brazilian real, Russian ruble and Mexican peso.

Key Themes

• An uneven pace of respective economic recoveries has resulted in diverging paths of monetary policy from major central banks. Despite a modest hawkish shift at its latest meeting, the Fed is likely to keep monetary policy accommodative for the time being, while many international central banks are likely to continue their monetary policy normalization cycles.
• We believe the renewed strength in the U.S. dollar will prove temporary, and we maintain our view for a weaker dollar over the medium-to-longer-term. A patient Fed relative to more proactive foreign central banks, should weigh on the greenback over time. We continue to be optimistic on the prospects for G10 and emerging market currencies going forward.
• While we believe there is upside in many emerging market currencies, shifts in local political dynamics can weigh on certain currencies, particularly in Latin America. The rise of left-leaning populist leaders in Chile and Peru could restrain the peso and sol, while demonstrations across Colombia could result in a socialist candidate emerging ahead of next year's Presidential election and inject new volatility into the Colombian peso.

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