Interview
What’s Ahead for the U.S. Dollar?
- New dollar short positions may be considered if lower rate volatility creates opportunity.
- The euro and related currencies are expected to be the primary appreciating assets against the dollar over the next few months, with a specific 12-month forecast of 1.28 for the euro-dollar cross.
- European growth prospects are viewed positively with vaccinations anticipated to ramp up substantially in the coming months.
- Firm forecasts for European equity markets have been upgraded to project higher returns relative to the U.S. over the next 12 months.
- European Central Bank bond purchase policies are expected to undergo changes during the summer, potentially leading to a modest rise in interest rates.
- Recovery fund issuance is projected to accelerate mid-year, beginning in July, offering attractive opportunities for sovereign investors.
- The dollar's share of global foreign exchange reserves is expected to decline over the medium term as competition from the euro and Chinese yuan increases.
- Significant portfolio flows into the Chinese market are anticipated, which could further challenge the dollar's reserve status over time.
- The transition away from the dollar as the dominant global reserve currency is expected to be a very slow-moving trend involving gradual substitution.
- Proposed changes to U.S. corporate tax policy under the Biden plan are estimated to reduce next year's S&P 500 earnings per share by approximately 9%.
- Lower projected returns for U.S. markets compared to international markets over the next 12 months may trigger capital outflows in search of higher yields.
- These potential capital outflows from the U.S. are expected to exert additional downward pressure on the dollar's valuation.