After the selloff in 2020, the USD started firmer in 2021 amid increased financial market volatility. Several factors support the USD at the moment but it is unclear whether this is a temporary correction or the start of a prolonged period of USD strength as in 2018. In our view, sustained USD strength requires prolonged US economic outperformance, rising expectations of an earlier tightening in US monetary policy and improvements in the fiscal and external deficit dynamics.
Economy and Interest Rates
First-quarter growth is depressed by the rise in Corona infections. However, manufacturing activity is holding up well and the outlook improves with the expected wide-spread deployment of Corona vaccines although progress does vary from country to country. The return to “normalcy” is set to unleash pent-up demand.
The USD rebounded since the start of the year. Among major currencies only the GBP managed to do better. The performance ranking of the major currencies reflects the respective Corona vaccination progress.
Going into more detail: Based on our proprietary analytical framework to take scalable exchange rate positions we are taking a close look on individual currency pairs.
The USD declined further in May as vaccination and recovery momentum increased in other economies...» more