US Dollar Index: Biden's relief package to reawaken USD bears – CIBC

USD depreciation is set to resume as the global economic recovery gains momentum in the view of economists at CIBC Capital Markets who forecast the US Dollar Index at 88.20 by the end of the second quarter.

Key quotes

“So far this calendar year, the trade-weighted greenback has been a sleepy story. We expect that to continue in the near-term as the market is still quite short USD. Additional tailwinds could also come from the recent rally in longer-dated Treasury yields, but we expect these to have a marginal effect on the USD given the current pace of the Fed’s QE buying and that the costs to hedge for foreign asset managers are still quite considerable. 

“What could reawaken the USD bears is the influx of liquidity that’s expected to come as Congress passes the upcoming relief bill. That should increase reserve balances on the Fed’s balance sheet and pressure short-term rates lower by extension. From prior experience, we know that this can materially dent the USD against other currencies.” 

“Other long-term headwinds to the USD include the Fed’s average-inflation framework, the diversification of foreign flows away from UST, and upcoming talks on digital taxes. While incoming data should be supportive, we expect the Fed to look past this in the near-term and for the USD to continue to trade defensively.” 

“We’ll need to wait until H2 2022 before we start to see the USD materially outperform against overseas majors on a sustained basis. That’s tied to our view that the Fed will start tightening in 2023.”