The Dollar continues to advance against the Euro, and British Pound, say foreign exchange analysts at Bank of America. Research briefing to clients says that a period of U.S. economic outperformance and linked Dollar “exceptionalism” will not evaporate in the foreseeable future.
U.S. Exceptionalism Expected
The investment bank says they have been expecting general U.S. exceptionalism for some months now. This expectation is now borne out in the current market forecasts for robust near-term U.S. economic growth.
Bank of America economists have recently revised upward revisions for U.S. interest rates due to these expectations.
“The U.S. dollar appreciated at the beginning of March to the highest level since late-November, moving in close lockstep with the upward shift in U.S. rates. Despite lack of follow-through as yet, we continue to expect a trend of USD appreciation this year,” says John Shin, FX Strategist at Bank of America.
The Dollar defied investors and analysts alike by gaining in the first quarter of 2021 and upended a solid consensus that 2021 would be a year of decline for the currency.
Polling of the analyst community showed an overwhelming preference for Dollar decline at the start of 2021, while positioning data showed speculators overwhelmingly betting their money against the Dollar.
A look at relative performance in the G10 space shows that the Dollar has advanced against all its peers, apart from the Canadian Dollar and Pound, with the biggest gains coming against the low-yielding Yen and Franc.
Bank of America currency strategists and economists expect a strong decoupling of the U.S. from the Eurozone economy and think the U.S. economy is likely to outperform by a wide margin in 2021.
Driving the outperformance is the superior vaccine rollout in the U.S., accompanied by a “particularly aggressive fiscal stimulus.”
Economists expect 6.5% GDP growth and higher than anywhere in G6 and much of the Emerging Market space.
Bank of America forecast Eurozone GDP to be 4.3% below pre-COVID GDP this year, recover to the pre-COVID level only in 2023, and remain well below the pre-COVID trend years ahead, by 5.3% next year.
“The risk is for an even stronger U.S. decoupling than we expect,” says Shin. “Against a backdrop of strong relative growth and rising interest rate differentials, we expect supportive capital flows into USD.”
Bank of America forecasts the Euro-to-Dollar exchange rate to trade at 1.18 by the end of June but fall to 1.15 by year-end.
The Pound-to-Dollar exchange rate is forecast to fall back to 1.35 by the end of June and 1.31 by year-end.
In 2018, U.S. dollar strength was the major theme for currency markets, a performance in stark contrast to what was seen in 2017 when it was among the worst performers globally.
Put, with markets already expecting further monetary policy from the U.S. Federal Reserve and not enough risk being priced for tighter policy from other central banks given current economic conditions, it is believed that the U.S. dollar will weaken from expensive levels.