The behavior of the U.S. dollar this year—up 2.9%—has confounded just about all the currency strategists and has certainly been at odds with our expectations from the start of the year. The strength of consensus expectations for a weaker dollar in 2021 was always the biggest risk, in our view, for a weaker dollar in 2021. Nonetheless, we believed the looser fiscal policy combined with looser monetary policy (in both absolute and relative terms) to the rest of the world, in addition to the ongoing global economic recovery, and, therefore, less need for a safe haven currency, would likely be a toxic recipe for further dollar strength.
In this Economics Weekly, we argue that the dollar is too high in the near term, though over the longer term we may actually see a stronger dollar as a reflection of the dynamism taking place in the U.S. economy relative to the many other parts of rest of the world.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.