The U.S. Dollar Index, which gauges the dollar’s value against six other major currencies, climbed 3.6 percent in this year’s first quarter, its best stretch since 2018, the Financial Times reported.
The buck’s three-month performance seemed to contradict forecasts by the majority of analysts who predicted the dollar would lose about 3 percent this year after sliding 6.8 percent in 2020.
Observers were expecting the global flood of dollars, rock-bottom U.S. interest rates, and rebounding economies elsewhere would lure investors away from the dollar’s safety.
Instead, the dollar rose 7.2 percent against Japan’s yen, with that currency posting its worst performance in seven years against the greenback in March. In the same month, the euro saw its biggest loss against the dollar in three years; the Chinese renminbi recorded its worst month versus the dollar in a year.
The U.S.’s strong economic recovery, driven by massive federal stimulus spending and record-low interest rates, has kept the dollar afloat. As we have forecast, inflation will rise and so, too, will interest rates, which, in effect, will make dollar investments more attractive… short term.
As inflation rises, so will interest rates. Thus, the sharply-rising “Biden Bounce” economy and equity markets that have been artificially propped up with cheap money will swiftly decline. But short term, rising interest rates will make the dollar attractive. According to the forecasts, the U.S. economy will outperform most of the rest of the world this year and should post growth two percentage points higher than Europe’s.
New Game
Anxious about inflation, money markets are pricing in an interest rate hike early next year, the FT reported, although the U.S. Federal Reserve said earlier this month that rates would be pinned near zero until at least 2023.
The dollar’s resilience sparked a bond-market sell-off, forcing interest rates up and making dollar-denominated investments even more attractive.
The dollar lost some of its mojo early this month, however, slipping 1.2 percent against the currencies of major U.S. trading partners and marking the week of 5 April as its worst since December.
The broad global economic recovery is likely to continue to lure investors out of dollars and persuade central banks to shrink their stores of greenbacks, Steven Englander, chief foreign-exchange researcher at Standard Chartered, said to the WSJ.
TRENDPOST: Around the world, central banks have let their stockpiles of dollars fall below 60 percent of their foreign currency reserves for the first time in about 25 years, he noted. (See related story.)
The following comments support our dollar trend forecast:
“Our expectations of a bounce in global growth and ongoing stimulus do not provide much reason for reserve managers to reverse and start re-accumulating dollars,” he said.
“We’ve stuck with the bearish view,” Zach Pandl, a currency and interest-rate strategist at Goldman Sachs, told the FT. “The dollar is more likely to weaken over the next few months.”
“We do not think that the long-term [negative] outlook for the dollar has changed,” agreed currency analyst Calvin Tse at Citi.
