The strength of the U.S. dollar may start to slip during the remainder of 2021 as the U.S. and global economies improve following the worst of the Covid-19 pandemic, according to a research note released Wednesday by UBS and echoed by analysts who told Forbes low interest rates in the U.S. and growing consumer and business interest in buying foreign goods could dampen the greenback.
The DXY Dollar Index – a measure of the value of the U.S. dollar against currencies of major U.S. trade partners, including the euro and pound sterling – has climbed about 3.5% year to date, after dropping about 7.1% last year.
The rise of the dollar has been accompanied by an almost doubling of the 10-Year Treasury yield year to date — higher yields (reflecting optimism for higher U.S. economic growth rates and the likelihood of higher inflation) tend to increase demand for U.S. Treasuries from foreign buyers whose domestic bonds in many cases offer lower or even negative yields.
But in a research note published Wednesday, Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote he expects the dollar to slide this year – he thinks the euro will equal $1.25 by year-end (up from $1.18 currently); and the pound sterling will equal $1.49 by year end (up from $1.38 currently).
Haefele explained the dollar is likely to slip versus the euro because he expects economic growth to accelerate in Europe and elsewhere as “the pace of vaccinations picks up in the Eurozone,” noting that a “broad-based global recovery” typically supports the euro.
Concurrently, Haefele noted, “robust” U.S. economic growth should benefit the currencies of foreign exporters and commodity producers because they will likely appreciate in value against the dollar as “investors abandon the safe-haven [of U.S. assets] and explore [assets] outside the U.S.”
Haefele also said that he expects the Federal Reserve to keep interest rates low for an extended period of time (low interest rates tend to pressure the dollar lower as investors seek higher-yielding foreign currencies).
John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, told Forbes he also thinks the dollar rally will weaken this year as he does not expect Treasury yields to rise much further. A strengthening U.S. economy, Stoltzfus explains, typically hurts the dollar because more U.S. businesses and individuals can buy foreign goods and assets, thereby increasing the value of currencies of exporting countries. “This has already begun to take place,” he adds. John Herrmann, U.S. rates strategist at Mitsubishi UFJ Financial Group, told Forbes that for the remainder of the year, either the pace of the dollar’s gains may likely slow down, or it possibly could even reverse course and decline – depending on the relative strengths of the U.S. and foreign economies. “Will the U.S. economy and vaccine programs continue to outperform upon a relative basis, or, will foreign nations ultimately turn around their management of the pandemic and, in so doing, strengthen their economic prospects,” he offered. The Fed also will play a major role in determining the fate of the dollar. Brian Rose, a senior economist at UBS, told Forbes the Fed is likely to keep rates near zero through the end of 2023. “Unless the Fed is hiking rates, larger budget and trade deficits [meaning the U.S. buys more imports than it exports] should hurt the dollar,” he adds.
What To Watch For
Shahab Jalinoos, chief foreign exchange and rates strategist at Credit Suisse, told Forbes that profits generated by U.S. multinational corporations tend to be hurt by a stronger dollar, because it can make U.S. exports more uncompetitive (therefore hurting revenues), while making imports cheaper.
While the dollar is up so far this year, the DYX Dollar Index is actually down about 6.8% over the past 12 months. “This indicates that the dollar had already begun to weaken as the pandemic risk was perceived to be reduced by the scale of the U.S. response and anticipation of vaccines of greater efficacy to counter the spread of Covid-19,” Stoltzfus says.