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Central banks
Opinion
David Brown
David Brown

Macroscope | Why the US dollar will remain on the comeback trail for many months

  • While the dollar outlook has been cloudy in the recent years, it is fighting back, thanks to tougher interest rate tightening expected from the Fed and a brighter political climate under US President Joe Biden

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A clerk checks US$100 banknotes at the headquarters of Hana Bank in Seoul, South Korea, on July 5. Photo: EPA-EFE
David Brown
The dollar has had some pretty bad press in recent years, due to the Federal Reserve’s overly loose monetary policies, waning investor appeal and acute political worries under former US president Donald Trump. But, far from being on the skids, the dollar is fighting back, thanks to tougher interest rate tightening talk from the Fed and a much brighter political outlook under US President Joe Biden, with investors taking a more constructive view on the currency.
For investors worried about the rising threat of Covid-19 variants, the dollar also remains an ideal hedge against an uncertain world. The dollar’s credentials as the world’s major reserve currency, offering unbridled liquidity free from official interference, remain unparalleled and a big draw for investors.

It’s no surprise the US dollar index against a basket of major currencies recently hit a three-month high. The dollar should remain on the comeback trail for many more months to come.

Sources: Datastream, CNBC
Sources: Datastream, CNBC
The dollar has plenty of good support from the fundamentals too, including relative interest rate appeal, a solid economic growth advantage and strong capital inflows as international investors tap into the vibrant US stock market rally. The US economy stands to gain so much more thanks to Biden’s promise to get the economy back into better shape with an extra US$1.9 trillion of fiscal stimulus to get the job done.
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It’s already boosting recovery expectations and reviving the US job market, generally perceived as a lagging indicator of economic well-being. US employment payrolls rose 850,000 in June, beating the 700,000 forecast, with the unemployment rate unexpectedly rising to 5.9 per cent from 5.8 per cent, a positive sign though, considering that more people were seeking work and now being counted among the jobless.

It’s no surprise that recovery expectations are riding high with the US growth rate expected to reach 6.9 per cent this year, according to forecasts from the Organisation for Economic Cooperation and Development. This compares more favourably than the 2021 growth forecasts of 4.3 per cent for the euro zone and 2.6 per cent for Japan, although China is expected to come through stronger at 8.5 per cent growth.

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It’s why global investors remain so upbeat about the outlook for US equity markets this year as the US economy returns to better health. US growth momentum is expected to carry through to an above average 3.6 per cent expansion rate in 2022. Overseas demand for the US equity rally should exert major pulling power in the dollar’s favour this year.

US President Joe Biden speaks in Pittsburgh, Pennsylvania, on March 31. Biden unveiled a massive infrastructure plan aimed at modernising the country’s crumbling transport network, creating millions of jobs and enabling the country to out-compete China. Photo: AFP
US President Joe Biden speaks in Pittsburgh, Pennsylvania, on March 31. Biden unveiled a massive infrastructure plan aimed at modernising the country’s crumbling transport network, creating millions of jobs and enabling the country to out-compete China. Photo: AFP
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