Uncertainties surrounding the US dollar’s path in 2021 are fading and bulls might finally have their day in the sun, Bank of America said Tuesday.
Strategists led by Athanasios Vamvakidis boosted their forecast for the US currency on Tuesday, expecting it to strengthen to 1.15 dollars per euro by the year-end. The forecast compares to Wall Street’s consensus of a 1.25 exchange rate.
A higher euro-dollar rate means a weaker greenback, as more of the US currency can be purchased with a single euro. The currency pair already trades at the bank’s first-quarter forecast of 1.20, down from roughly 1.23 at the start of the year. The team already expected upside for the dollar later in the year, but now sees several reasons why such strengthening can arrive sooner.
Detailed below are the five reasons Bank of America expects the dollar to strengthen in 2021.
The Fed-ECB gap
After taking several actions to pump dollars into the struggling US economy, the Federal Reserve is starting to near the end of its ultra-easy policy stance. Some officials have started talking about tapering the central bank’s asset purchases. The Fed quickly rebuffed concerns of premature tightening, but the mixed communication suggests policy normalization could arrive early next year, the strategists said.
It’s a different story on the other side of the Atlantic. The European Central Bank has taken on more intense rhetoric against Euro strength in recent weeks. A strategic review of how the bank can reach its inflation target will likely reveal new tools for adding Euros to the economy.
“The bottom line is that the ECB will be moving towards more easing, while the Fed will be looking towards policy normalization,” the team said.
The Biden administration continues to move toward passing its $1.9 trillion stimulus proposal without Republican support in a bid to supercharge the US economic recovery. While such a large fiscal relief package does weaken the dollar somewhat, it also increases the risk of earlier policy normalization by the Fed, the strategists said. In all, the measure should support the dollar’s strength, they added.
Fiscal policy in the European Union, however, is “not as supportive and if anything could be tightened too early,” the team said.
The global economy is expected to rebound in 2021 as widespread vaccination brings an end to the coronavirus pandemic. Still, Bank of America’s strategists expect US growth to handily outpace that of the EU.
The team projects growth of 6% in 2021 and 4.5% the following year, exceeding the consensus estimates of 4.1% and 3.5%, respectively. EU growth is estimated to reach 2.9% this year and 3.4% in 2021, the strategists said.
Inflation in the US is projected to similarly come in above price growth in the EU.
The US’s decoupling from the EU economy should support the dollar as US spare capacity fades and the rates market prices in early Fed normalization, the team said.
The dollar could be the next asset to face a massive short squeeze following the GameStop phenomenon in January, Bank of America said. The market continues to short the dollar despite the currency’s recent rally.
If the team’s projections are right and the US economy outpaces the EU’s, selling of the euro-dollar trade will likely cut into long positions and strengthen the dollar, the strategists said.
Return of the safe haven
The risk-on party that’s lifted stocks through the year-to-date won’t last forever, and a reversal stands to push more investors into cash positions, the team said. Bank of America expects positioning in risk assets to peak in the first quarter before policy support hits its limit the following quarter. A 10% market correction is forecasted to arrive sometime this year and shake investors’ appetite for stocks, they added.
Starting the year with assets at record highs “does not leave much room for further upside,” the bank said. The relatively slow pace of global vaccination means it could take years to fully emerge from the COVID-19 crisis. Realization of the long path to recovery should prop up the dollar in the near term, according to Bank of America.
“A more challenging outlook for risk assets this year also suggests a less clear foreign-exchange picture and upside USD risks,” the strategists said.
Dollar Drops to One Week Low on Monday After U.S Consumer Sentiment Plunges to Lowest in 10 Years
The United States Dollar declined to a week-low against most currencies on Monday after dropping the most in seven weeks on Friday after a report showed U.S consumer sentiment dropped to the lowest since 2011 amid rising COVID-19 infections.
The dollar index, which tracks the greenback against six counterparts, changed slightly at 92.528, still maintaining a 0.50 percent decline posted at the end of last week.
However, the U.S Dollar dipped to 109.455 against the Japanese yen on Monday, its lowest since August 5, 2021. Against the euro common currency, the dollar was largely flat at $1.17960, near a week low of $1.18045 it closed on Friday.
“Does the survey signal an imminent turn in the U.S. economy? We doubt it given vaccine efficacy remains high and the hit to sentiment likely means more people will get vaccinated,” Tapas Strickland, an analyst at National Australia Bank, wrote in a client note. “Instead, the Delta surge in the U.S. is more a case of delay rather than derail as far as the recovery is concerned.”
Against the Nigerian Naira, the U.S Dollar traded exchanged at N515 on Monday at the parallel market popularly known as the black market. At the bureau de change section, the U.S. dollar was sold at N513 and N410.11 by the Central Bank of Nigeria.
Dollar Firm as Traders Brace for U.S. Inflation Data
The U.S. dollar held near multi-month highs on Friday as investors warily awaited U.S. inflation data, while the pound nursed modest losses after Bank of England (BoE) policymakers leaned away from flagging rate rises.
Early Asia trade was steady, with the euro pinned below its 200-day moving average at $1.1930 and the yen just short of a 15-month low at 110.955 per dollar.
The dollar vaulted to its highest levels since March against the euro last week – and to its highest since March 2020 on the yen – after the U.S. Federal Reserve surprised markets by projecting interest rate rises sooner than expected in 2023.
Subsequent rhetoric from Fed chair Jerome Powell seems to have calmed nerves in bond and stock markets about hikes any time soon, but the dollar has held its gains and traders are wary of further rises if inflation is hotter than forecast.
Economists polled by Reuters expect core personal consumption expenditures index to post year-on-year gains of 3.4%, a rise even faster than the nearly three-decade high pace of 3.1% recorded last month. The data is due at 1230 GMT.
“The dollar can jump if inflation surprises to the upside,” said Joe Capurso, head of international economics at the Commonwealth Bank of Australia in Sydney. “Upside inflation surprises have been the trend in the U.S. recently,” he said.
The stronger dollar has kept other majors in check through the week, even against currencies where rate rises are likely to land sooner than in the United States.
The New Zealand dollar has crept back above its 200-day moving average to $0.7063, but it remains well shy of February highs above 74 cents. In Australia, despite booming terms of trade, the Aussie held at $0.7584.
“A more balanced dollar outlook prevails after the Fed’s decisive policy shift,” Westpac strategist Sean Callow said.
“The Australian dollar’s strong support from commodity prices produces fair value estimates in the mid-0.80s,” he said.
“Yet recent price action has been in the mid-0.70s. With risk appetite looking resilient, any narrowing in this gap probably depends on how far the (Fed)-inspired U.S. dollar recovery can extend.”
The U.S. dollar index was steady at 91.833, off a week-ago high of 92.408 but clear of troughs below 90 that it had plumbed in May.
Sterling had started to move away from its post-Fed lows, but was the weakest G10 currency overnight and fell 0.3% after the BoE failed to provide any hint it was in a hurry to hike rates and warned against “premature tightening”.
“Some in the market obviously positioned for a less dovish or a hawkish tilt,” said Tapas Strickland, director of economics and markets at National Australia Bank.
U.S Dollar Gained as Fed Shifts Interest Rates Hike from 2024 to 2023, Crypto Drops
The United States Dollar gained on Thursday after the Federal Reserve raised inflation expectations to 3.4 percent and moved the year it is expected to raise interest rates from 2024 to 2023.
Policymakers suggested that interest rates could be raised twice by late 2023 given “Summary of Economic Projections” (SEP) released on Wednesday.
The dollar index, which tracks the greenback against six major currencies, gained 0.63 percent to 91.103, its highest since May 6.
The jump was as a result of renewed interest in the American economy as growth is expected to hit 7 percent in 2021 despite the rising inflation. Similarly, economic conditions are projected to improve faster than initially predicted.
The Federal Reserve Chair Jerome Powell said “the economic conditions in the committee’s forward guidance will be met somewhat sooner than previously expected.”
“The interesting thing is that the Fed has gone beyond simply acknowledging that inflation is rising and that the U.S. economy has a lot of momentum, and it has essentially shifted to a much more hawkish stance in this set of projections,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
Powell said the central bank will maintain its $120 billion monthly bond-buying program to continue to support the economy but also suggested the possibility of pulling back on quantitative easing used to keep rates low.
“I think we’re back to talking about a mild rally in the U.S. dollar and the data becoming very important over the summer period prior to Jackson Hole and September’s meeting,” said Simon Harvey, senior FX market analyst at Monex Europe.
Billions Flow Out of Crypto Market Ahead of Better US Economy
Investors are moving money in billions out of the crypto market, according to Whale Alert reports. On Thursday, 26,999,9990 USDT valued at $26,999,990 was transferred from Binance to an unknown wallet while another 19,999,995 USDT transferred from Bitfinex to an unknown wallet.
Investors moved 20,000,000 USDT to Bitfinex; 55,180 Ether worth $134,030,121 from an unknown wallet to another unknown wallet and 55,000 Ether estimated at $133,389,506 was also transferred to an unknown wallet in the early hours of Thursday.
5,000 Ether worth $12,168,082 and 1,000 Bitcoins worth $38,953,357 were transferred from an unknown wallet to Binance. To see the rest of the money being moved out of crypto space visit Whale Alert.
Cryptocurrency market capitalisation dipped by 5.03 percent in the last 24 hours but has lost $898 billion from $2.523 trillion it attained on Wednesday, May 12, 2021, to $1.625 trillion on Thursday, June 17, 2021.
The plunge in cryptocurrency was a result of improving global economic outlook, especially in the United States of America, the largest crypto investing nation.
The unregulated crypto space is largely treated as a haven asset to avert disaster during the global downturn. Meaning, an improvement in the global economy will generally impact cryptocurrency capital inflow and overall performance. Investors King expects cryptocurrency to extend its decline in the third quarter.
ECOWAS Imposes Sanctions on Guinea Junta Over Coups
Lagos Free Zone Company Issues N10.5B Series 1, 20-year Corporate Infrastructure Fixed Rate Bond in Nigerian Capital Market
NGX Returns to Red Zone Following Two Days of Consecutive Gains
Naira2 weeks ago
Naira Plunges Further, Exchanges at N530 to U.S Dollar
News3 weeks ago
Buhari Terminates Appointment of Power and Agriculture Ministers
Economy3 weeks ago
Nigeria Economy Grows 5% In Second Quarter, Its Third Consecutive Growth
Government4 weeks ago
Hakainde Hichilema Sworn In As Zambia President
Energy3 weeks ago
NNPC Made A Net Profit of N287B in 2020 – Buhari
Banking Sector3 weeks ago
Zenith Bank Launches Intelligent Chatbot, ZiVA
Appointments3 weeks ago
CBN Appoints Six New Directors, Confirms Nwanisobi Spokesman
News4 weeks ago
FirstBank’s Sponsored “First-Class Material” Continues To Empower and Celebrate The Nigerian Youth