Having fallen back to near its post-pandemic lows, economists at Capital Economics don’t think that the decline in the US dollar will continue. They explain why instead the dollar is expected to strengthen against most currencies over the next 12-18 months.

US government bond yields there will generally rise faster than those elsewhere

“We continue to think that the yields of government bonds will rise more in the US than elsewhere over the next few quarters and that this will push the dollar higher against most currencies.”

“We forecast a relatively uneven global economic recovery in which the US economy outperforms thanks to its significantly larger policy stimulus. That is in contrast to the two major economic downturns, when the US economy lagged behind its peers in Europe and Asia.”

“We expect activity in China to slow due to the withdrawal of policy stimulus and fading export growth, pushing the renminbi lower against the dollar. Elsewhere, we think most emerging markets currencies will decline against the dollar due to a backdrop of higher US Treasury yields and most EM central banks tightening policy more gradually than investors currently expect.”

“As for the outlook beyond 2022, our view is that the dollar will eventually give back its gains against most currencies, for two reasons. First, we expect yield gaps to shift in favour of the rest of the world as the global economic recovery evens out and other major economies start to catch up with the US. Second, we think the dollar is moderately overvalued, warranting a gradual decline over the medium-term.”