US dollar set to strengthen again before long – CE
While the US dollar has held its ground, or gained slightly, against most major currencies over the past couple of days, the bigger picture is that it has been on the back foot over the past few weeks. Since the end of March, it has depreciated against all other G10 currencies. Economists at Capital Economics don’t expect the recent weakness in the US dollar to persist. On the contrary, the greenback will strengthen against most major currencies.
Diverging bond yields
“We suspect that, rather than risk appetite, relative yields will continue to be the key driver of the US dollar over the next couple of years. But in contrast with the past few weeks, we think they will ultimately lead to a stronger dollar.”
“As far as risk appetite is concerned, we don’t think it will wane much more, given the rosy outlook for economic growth. Nonetheless, most measures of global risk premia (such as equity market earnings yields, corporate bond spreads, and volatility) are now at, or below, pre-pandemic levels, so we don’t think appetite for risk will recover a lot either.”
“In the US, where the vaccine rollout has been particularly rapid, and fiscal support particularly large, we suspect prospects for growth and inflation are among the best in the developed world. This, we suspect, will ultimately result in US yields beginning to rise again, and at a faster pace than in most other countries. Our expectation is that this will drive the US dollar generally higher.”
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FXStreet Insights Team
FXStreet
The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.
