U.S Dollar Strength: Temporary or a long-term trend?

3 thg 2, 2021

The Dollar Index (DXY) has been positive going into 2021, returning just under 2% year to date. Goldman Sachs. With Goldman Sachs and other large institutions touting their bearish views due to Joe Biden’s stimulus, low-interest rates and an appetite for Gold, the recent strength in the dollar has tested their analysis.

However, with Morgan Stanley abandoning their calls for a weaker greenback, with Matthew Hornbach stating that “It’s no longer attractive to be positioned for a weaker dollar from here given the uncertainties around the fiscal policy outlook, the monetary policy outlook, and the growth and inflation outlook,” are we seeing a turn in consensus?

Quicker return to normal providing tailwinds for the U.S Dollar
Analysts are looking at the pace of vaccinations in the United States and worldwide, with predictions being made that a return to normal may be sooner than we think, especially when financial markets and economic policy are concerned. Federal Reserve minutes suggest that a possibility of talks regarding the normalization of monetary policy can start as early as June.

A quicker and more robust recovery may mean Republicans may have a leg to stand regarding a lower stimulus figure. Later this week ahead, we will see the non-farm payroll numbers for January. A higher-than-expected figure may suggest that the American recovery is faster than expected, and a lower stimulus figure from the 1.9 Trillion headline figure suggests. Lower than expected stimulus should put less downwards pressure on the supply side of the U.S Dollar.

Swiss Franc may be the Most Vulnerable
With both the U.S Dollar and the Swiss Franc being relative currency safe havens, relative strength in one will bode strong movements in the other. The U.S Dollar has appreciated over 2% year to date, with Morgan Stanley analysts suggesting to short the Swiss Franc against the Canadian dollar while waiting on signs to turn bullish on the U.S dollar.