FX Talking: Dollar bear trend: Shaken not stirred

Yet, as long as the re-opening of economies remains on track from 2Q – which we still believe to be the case – volatility should give way to a resumption of the dollar bear trend later this year.

Having fallen 14% from its highs in March last year, broader trade-weighted measures of the dollar registered a 2% recovery in January. Driving this so far modest correction has been a mixture of rising US Treasury yields and more recently stalling/correcting commodity and equity markets – as confidence in the 2H synchronised recovery wanes.

While lockdowns will mean that Europe lags, we still expect this region to nonetheless participate in recoveries from 2Q onwards – likely led by strong growth by the US and China.   As long as those recovery expectations hold up – and crucially the Fed sticks to its new policy strategy of allowing the economy to run hot – the $ should weaken. 

Despite ECB threats to cut rates, we still expect EUR/$ to be pressing 1.25 this summer and possibly break above it amidst broad global growth into year-end. The PBOC is allowing a more market-determined path for the CNY and we retain a 6.20 $/CNY target.

Regionally European currencies may lag, though we have upgraded our GBP forecasts on the vaccine roll-out and retain bullish CZK forecasts on prospective CNB tightening. And elsewhere we look for the commodity FX bloc to shine after 1Q wobbles.