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.
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.
Dollar Struggles for Momentum as Markets Wait for Inflation Data
The dollar stabilised on Monday after dropping on Friday following lower-than-expected U.S. jobs data, and currency markets broadly lacked momentum as investors looked ahead to key inflation data later this week.
Friday’s jobs data was seen as a relief for markets, showing a pick-up in job growth was not strong enough to raise expectations for the U.S. Federal Reserve to tighten its monetary policy any sooner, and this hurt the dollar.
There was little movement in major currency pairs during the early European session on Monday. World shares were trading near record highs.
At 1125 GMT, the dollar index was flat on the day at 90.141. The euro was down 0.1% against the dollar, at $1.2159.
The Australian dollar, which is seen as a proxy for risk appetite, was up 0.2% versus the U.S. dollar at 0.77535 .
“After Friday, we’re looking at a foreign exchange market that’s still got no reason for the Fed to change its tune, so we’ve still got accommodative monetary policy in the United States,” said Kit Juckes, head of FX strategy at Societe Generale. “But on balance we’re getting more optimistic about the global economic and health outlooks.”
Market participants were focused on U.S. inflation data and the European Central Bank meeting, both on Thursday.
Dovish rhetoric from ECB policymakers suggests the bank is in no hurry to slow the pace of buying under the 1.85 trillion euro ($2.24 trillion) Pandemic Emergency Purchase Programme (PEPP).
But U.S. Federal Reserve policymakers have begun inching toward a discussion about winding that help back.
“A divergence has opened up recently between the ECB and Fed who have signalled a willingness to discuss QE tapering at upcoming meetings,” MUFG currency analyst Lee Hardman wrote in a note to clients. “It will help dampen upward momentum for EUR/USD. However, the developments are not sufficient to alter our bullish outlook the pair beyond the near-term.”
Speculators decreased their net short dollar positions in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
China’s yuan hovered around the key 6.40 level, with the offshore yuan changing hands at 6.3960.
China’s export growth missed forecasts and imports grew at their fastest pace in 10 years in May, fuelled by surging demand for raw materials. read more
“In general, the trade sector continues the strong performance indicating that the manufacturing sector remains the leading role in the post-pandemic recovery,” wrote Commerzbank senior economist Hao Zhou in a note.
“However, the trade data might have little FX market impact, as the authorities vow to keep a stable currency for the time being.”
Elsewhere, the United States, Britain and other rich nations reached a deal on Saturday to squeeze more money out of multinational companies such as Amazon and Google and reduce their incentive to shift profits to low-tax offshore havens.
Investors were wary of how tech stocks would react, in terms of currency markets, but ING strategists wrote in a note to clients that the plans for a minimum global corporate tax rate of at least 15% could result in a repatriation of global capital over a longer term which would be positive for the dollar.
“Our thoughts here are that the removal (of) tax havens could have implications for the hundreds of billions of dollars of cash parked overseas by US multi-nationals – reducing the incentives to keep cash overseas,” they said.
In cryptocurrencies, bitcoin was up 2% around $36,535 , while ether was up 4.2% at $2,825 . Both were trading within the month’s relatively narrow ranges.
Dollar Heads for Weekly Loss as Taper Fears Ebb
The dollar hovered around recent lows on Friday and was set to notch a modest weekly drop as traders’ concerns at taper talk in Federal Reserve minutes faded, though a pullback in commodity prices and nerves about virus outbreaks kept losses in check.
The dollar has given back a bounce it made after a mention of possible future tapering discussions, in minutes from the Fed’s April meeting, prompted fears of early rate rises.
Investors now figure that any action remains a long way away and that the path might again be clear for a resumption of April’s downtrend as the U.S. trade and account deficits weigh.
Against the euro the dollar was parked at $1.2230, not far above the four-month low $1.2245 it hit earlier in the week and close to testing major support around $1.2345. The dollar index was held below 90 and was last at 89.777.
The index, which measures the greenback against six major currencies, is down about 0.6% for the week so far. Against the Japanese yen the dollar held at 108.74, for a weekly loss of roughly 0.5%.
“It has been just over 24 hours since markets got spooked by the prospect of the U.S. Fed tapering its asset purchases, but having proverbially slept on it, the mood seems less sour,” ANZ analysts said in a note. “Which seems reasonable – it’s not like the Fed is on the brink of wanting to actually act.”
SHADOW OF A DOUBT
Lingering doubts about the Fed as well as worry about new COVID-19 outbreaks and curbs to contain them in Malaysia, Thailand, Taiwan, Vietnam and Singapore held most of the majors steady in Asia.
Pullbacks in commodity prices after measures to curb speculation in China weighed gently on the export-exposed Australian and New Zealand dollars. Each fell about 0.2%.
“European re-opening is a theme playing out in the background, but to fear or not to fear Fed taper is still an issue,” said Bank of Singapore currency analyst Moh Siong Sim.
Sterling, which is heading for a third consecutive weekly gain and has climbed 2.6% during May so far, was pinned just short of multi-year highs as traders await retail sales and Purchasing Managers’ Index data due later on Friday.
April figures may be depressed by lockdowns, but the hope is that Britain’s reopening this week is going to lay a solid foundation for recovery in a population where just shy of three-quarters of adults have had their first inoculation shots.
Sterling last traded steady at $1.4185.
Left behind in all the recent focus on inflation, tapering and future hikes has been the Japanese yen. It is near its weakest in three years at 133.02 per euro and is poised for a fifth consecutive weekly loss against the common currency .
Against the dollar, the yen has slid 5% for the year to date and is the worst performing G10 currency. It has fared even worse on some crosses, shedding nearly 10% on the Canadian dollar and nearly 9% on the pound.
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