Reviewing the Dollar’s outlook for the rest of 2021
The Dollar’s value against both the Pound and Euro has trended upwards in recent months, with exchange rates moving broadly in the Dollars favour despite some jitters in early June. The Biden presidency has provided some stability as the economy begins to recover from the pandemic, but there are still many factors at play.
Despite a bearish start to the year, investors have begun to warm to the Dollar’s long term prospects throughout Q2 and into Q3, with a particularly marked jump up in long Dollar futures positions in July. While futures make up only a small part of the $6.6tn-a-day foreign exchange market, they provide an important metric of investor sentiment.
This rise has been sparked by the Federal Reserve indicating that interest rates could rise sooner than expected from the lows seen during the depths of the pandemic. The currently low interest rates are likely to remain there in the short term, sparking increasingly founded fears of inflation. Fed chief Jay Powell has stressed the Fed’s view that this current burst of price rises is due to transitory factors and that, if inflation fears become more sustained, the Fed will act accordingly.
Despite these comments, investors are betting on a rise in the Dollar’s value along with the coming interest rate rise. The rate rise is currently projected to come in early 2023, brought forward from 2024. While this may seem a long time away, the bringing forward has given investors the confidence they needed to begin to move assets now.
The Dollar has been further bolstered by another move from the Fed: a planned reduction in the $120billion a month asset purchases, one of the key drivers of the global equities rally that has protected markets from the potentially catastrophic impact of the pandemic. This planned tapering drove investors out of now less-protected equities and into safe haven investments, such as the Dollar, further driving up its value. However, this removal of support could also introduce some volatility to the wider economy.
These factors paint a positive image for the Dollar in the short to medium term, but also suggest a more fundamental shift longer term. The huge stimulus and vaccine bounce had led to investors leaning more heavily into riskier, typically more volatile assets due to heavily supported growth. Now that these factors are beginning to fade and more sober assessments of the economic situation begin to prevail, sustained global economic growth is far less certain, especially considering data out of China that suggests that the increase in industrial production is decelerating. As a result, expect more volatility across markets and subsequent shifts into more stable assets such as the Dollar and other currencies, likely skewed in the Dollars favour and thus gaining value against other currencies.
Of course, there could always be extraneous factors that affect this outlook. Coronavirus cases are rising significantly in America and 40% of the population have not received any doses of a vaccine. As a result, there is some potential disruption to the economy, and by extension the Dollar, to come. Those interested in trading Dollars would do well to stay abreast of these developments.
Overall, the outlook for the Dollar looks bright, but volatility in the recovery remains a concern in the medium term, and coronavirus still looms in the short term. If you are looking to buy or sell Dollars in the coming months it is worth speaking to one of our Foreign Exchange experts and protecting your funds against any potential market volatility.