The dollar rallied in the first months of the year, hitting the eyes of most Wall Street analysts who predicted a decline.
The dollar index, which tracks its value against six other major currencies, jumped 3.6 percent in the first quarter, the best since 2018 and has changed dramatically after falling 6.8 percent last year. Since then, it has dropped by about 1 percent.
The still strong growth from the beginning of the year to date has baffled analysts, whose expectations of a strong global recovery and a 3 percent decline in the global reserve currency this year were one of the strongest calls for consensus for 2021. On the contrary, these are signs that the US will outperform. other major economies pushed it.
“The dollar was strong. This is not surprising given the amount of pessimism that has gripped the markets, ”said Jim Leavisse, chief investment officer for government fixed income at M&G Investments, noting that investors were“ big ”with underweight this year.
Some of the dollar’s gains in the first quarter were particularly striking. It rose 7.2% against the Japanese yen, which ended its worst month in nearly five years in March. The same month saw the strongest drop in the euro against the dollar in three years, while the fall in the Chinese yuan was the largest since March 2020.
The strong consensus late last year was that weak monetary conditions in the US and a robust global economic recovery would put pressure on the dollar, enticing companies and investors to bet overseas and dampening demand for the dollar as a safe retreat. But it seems that this opinion was already related to the exchange rate.
“One of the biggest risks over the year was that every sales report said the same thing that the dollar would weaken,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management.
A sharp rise in inflation expectations has eroded this apparent rate, especially in light of the $ 1.9 trillion stimulus package proposed by the Biden administration.
The rally triggered a sharp sell-off in the bond market, which in turn boosted yields, which increased the relative attractiveness of US debt. “Treasury bonds are suddenly attractive” in markets like Japan, Leavis said.
What happens next with the dollar will largely depend on whether the Federal Reserve responds to a more aggressive inflation forecast. Policymakers said last month that they expect short-term interest rates to remain near zero until at least 2024.
But in both the bond market and the foreign exchange market, investors are not confident that central banks will allow the economy to warm up. Money markets are already preparing for rate hikes as early as next year.
As a sign of the change in sentiment, Deutsche Bank has already changed its forecast several times. Global head of monetary strategy, George Saravelos, set off for 2021 expecting the dollar to fall and the euro to rise to $ 1.25 by June and $ 1.30 by the end of 2021. He said in mid-January that “the risks are shifted towards a stronger dollar in the coming months,” but by the end of February, he said it was time to sell the US currency again.
“We think the euro will return above $ 1.20 in the summer,” he said. “One of the reasons the market finds it difficult to name the dollar is because there are two forces moving in opposite directions.” It is now trading just below $ 1.19.
Zach Pundle, co-head of global monetary policy, interest rates and emerging markets strategy at Goldman Sachs, takes the bank’s gloomy view of the dollar, expecting the euro to trade at $ 1.28 by the end of the year, 10 cents above its current value. …
“I have some concerns about the immediate future. … …[but]we are bearish because I ultimately think the dollar is likely to weaken in the next few months, ”he said.
Calvin Tse, currency analyst at Citi, is also holding on to his bearish call for the dollar, which suggests the currency could fall 20 percent.
“We don’t think the long-term outlook for the dollar has changed,” he said.
Tse said that if higher bond yields are driven by higher-than-expected vaccine rollouts, a rebound in global trade and commodity prices, and better global growth, the dollar could still weaken.
But some investors believe that a sustained US economic recovery, coupled with an almost $ 1.9 trillion stimulus package from the government, will strengthen the dollar as the economy outperforms its competitors elsewhere.
In February, Bank of America analysts revised their forecasts for the euro from $ 1.25 to $ 1.15 at the end of the year, citing mixed messages from the Federal Reserve, a large financial stimulus package and a slow start to European vaccination efforts.
“We expect the dollar to gradually strengthen this year on the back of outperforming US performance and a possible normalization of Fed policy,” analysts wrote on March 31.