FX Viewpoint | The USD to grind higher versus most major currencies | Article – HSBC VisionGo
- Peaking global growth is likely to provide more support to the USD sooner than we had previously anticipated
- The Federal Reserve is also moving gradually towards monetary policy normalisation
- We pull forward the timing of a USD recovery, and expect the USD to strengthen through the rest of 2021 and into 2022
The sequential slowing of global growth is likely to provide more support to the USD sooner than we had previously anticipated
Since late last year, we have advocated that a weaker USD would be consistent with an improving global economic outlook. However, there are signs that global growth has peaked and is losing some momentum. For example, there was a sharp increase in the pace of global trade volumes last year but this has lost momentum lately (Chart 1). If we expected the USD to temporarily weaken this year against a still recovering global economy, then the opposite should also hold true.
The Fed’s path towards policy normalisation should support the USD gradually, especially when tapering actually starts
The global growth cycle is an important part of our USD framework but we do not rely on that alone. The Federal Reserve’s (Fed) plan to taper and its divergent monetary policy stance from other central banks should eventually guide the USD stronger, especially once tapering actually starts. The Fed’s growing proximity to the actual taper should see the USD mostly exhibiting pro-cyclical behaviour – strengthening when US data is good and weakening otherwise. The USD bullish response to the stronger-than-expected July US employment report is a recent example of a pro-cyclical USD (Chart 2).
A surge in risk aversion and a more rapid tightening by the Fed could see the USD strengthening more than we currently expect
There are of course risks, which, were they to crystallise, would inject a lot more urgency into our view of relatively benign USD strength. Among the candidates would be a renewed surge in risk aversion prompted by a particularly resistant COVID-19 variant, or a more rapid tightening by the Fed should inflation prove less transitory in the US than expected. We will be mindful of these and other risks, but the central story is one of transition.
In summary, we believe that the slowing global growth and the Fed moving gradually towards monetary policy normalisation should see the USD grinding higher versus most major currencies through the rest of 2021 and into 2022.
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