After turbulent times we had in 2020, it is clear that investors will not get much of a break in 2021. The volatility witnessed in the markets last year is still there, but there are some fundamental changes such as the ongoing global rollout of COVID-19 vaccination programmes among others. Many are expecting the global economy to recover this year, which is quite likely, but we’re wondering what might happen to the US dollar.
Will the US Dollar continue to fall or bottom out?
Will the US dollar, which fell 7% in 2020, continue to weaken in 2021? The answer is yes, but the decline will not be as deep, we cannot rule out the possibility that it will decline initially and then rally later in the year. The dollar’s performance will largely depend on the recovery of the U.S. economy, and whether Biden can implement positive changes in the U.S. as the market expects. The Fed has promised to maintain its large-scale asset purchase program and is open to expanding the programs, which is likely to weaken the dollar.
From a different perspective, the scale of financial support invested by the United States government to rescue the economy is higher than that of Europe. Hence, if such stimulus is effectively translated into economic growth, we can expect the dollar to rebound. In general, if the coronavirus pandemic could be controlled sooner than expected, the US economy could recover quickly ending the dollar’s decline.
Against this background, the U.S. dollar will also depend on the pace of the recovery across the global economy. A strong economic recovery in other developed countries would elevate investor appetite for riskier assets, which could drag the dollar lower. The US dollar is widely regarded as a safe haven asset, which booms when investors are worried about the future and falls when investors are confident. Therefore, even if the U.S. economic recovery is strong enough to lift the dollar, its upside could be limited by a much stronger global economic recovery.