The US dollar could remain strong In the short-term, according to analysts at Wells Fargo. On a longer perspective, they warn that with foreign central banks already active, and the Federal Reserve still relatively dovish, these divergences in monetary policy should place pressure on the US dollar.

Key Quotes: 

“Our 2021 global GDP forecast has been revised lower, and we now expect the global economy to grow 6.1%. The majority of the downward revision comes from a slightly less optimistic growth outlook in the United States; however, due to a renewed spread of COVID and harsh restrictions, we have once again lowered our 2021 GDP forecast for China. In addition, new restrictions have complicated the growth outlook for Australia, while we have become modestly more constructive on the Eurozone as leading indicators continue to suggest a more robust economic recovery.”

“Risks around our global growth outlook are tilted to the downside. COVID cases continue to rise, fueled by the spread of the Delta variant, which could result in disruptions to the global recovery. While we do not expect widespread lockdowns to be reimposed, we do have concerns that consumer behavior and spending patterns may be altered amid the rise in virus cases.”

“The U.S. dollar has rallied in recent weeks, and in our view, we believe dollar strength can continue in the short-term. A bounce in U.S. Treasury yields has supported the dollar, while the greenback may also be attracting safe haven flows given the rise in COVID cases. Over the longer-term, we maintain our view for U.S. dollar weakness as foreign central banks are likely to continue tightening monetary policy at a quicker pace than the Fed.”

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