USD to grind higher on a surge in risk aversion and more rapid tightening by the Fed – HSBC

Peaking global growth is likely to provide more support to the US dollar sooner than economists at HSBC had previously anticipated. They pull forward the timing of a USD recovery and expect the greenback to strengthen through the rest of 2021 and into 2022.

The Federal Reserve is moving gradually towards monetary policy normalisation

“There are signs that global growth has peaked and is losing some momentum. If we expected the USD to temporarily weaken this year against a still recovering global economy, then the opposite should also hold true.”

“Fed’s plan to taper and its divergent monetary policy stance from other central banks should eventually guide the USD stronger, especially once tapering actually starts.”

“There are of course risks, which, were they to crystallise, would inject a lot more urgency into our view of relatively benign USD strength. Among the candidates would be a renewed surge in risk aversion prompted by a particularly resistant COVID-19 variant, or a more rapid tightening by the Fed should inflation prove less transitory in the US than expected.”

“We believe that the slowing global growth and the Fed moving gradually towards monetary policy normalisation should see the USD grinding higher versus most major currencies through the rest of 2021 and into 2022.”