The new U.S. government promises heavy fiscal spending. That presents push and pull factors that may render the dollar stuck where it is.
After a rough 2020, the
U.S. Dollar Index
(DXY) has risen in 2021 and settled at just above 90 as the U.S. is expected to see a swift economic recovery. With President-elect Joe Biden and incoming Treasury Secretary Janet Yellen on the same page on fiscal policy—and with Democrats controlling both chambers of Congress—the dollar faces two opposing factors: added supply, which drags down its value, and support for the recovery, which lifts it.
Yellen on Tuesday stressed the importance of fiscal stimulus for the economy and the U.S. Dollar Index slipped 0.3%, which could indicate investors view the added dollar supply as negatively outweighing the firming U.S. economic outlook.
Wall Street also expects Yellen to tout a stronger dollar as a priority, although “actions are a little bit more important than jawboning and the actions of massive fiscal stimulus should be more important than comments from Yellen,” Dan Eye, head of asset allocation and equity research at Fort Pitt Capital Group, told Barron’s.
“I actually think the dollar is at a crossroads,” Lindsey Bell, chief investment strategist at Ally Invest, told Barron’s. “It’s stuck in limbo and stuck at these technical levels.” The Dollar Index has found support near the 90 level. After the last mini-stretch in which it traded at this level in 2018, it subsequently popped into the high 90. Bell emphasized the push-pull factors of added supply against faster growth will keep the dollar in a tight trading range.
Others look for more weakness. The dollar may hold its ground against the eurozone and other developed economies, but a cyclical upturn in emerging market economies, may tamp the dollar down against those currencies, Eye said.
Plus, the Federal Reserve is expected to keep plowing money into bond markets, keeping interest rates low. Some have begun to anticipate a reduction in the size of those programs, but “While the Fed may be eventually rein in easing, that remains an event on the far horizon,” wrote Mark Haefele, chief investment officer of global wealth management at UBS, in a note in which he said he expects more dollar weakness. An aggressive Fed means that interest rates have a natural cap. That limits the width of the gap between U.S. bond yields and foreign ones, restricting the dollar’s attractiveness.
As for stocks, a rangebound dollar allows other factors such as earnings and interest rates to have a larger impact on equity valuations. If the U.S. Dollar Index dives, investors will be nervous about economic growth at home and they’ll favor international stocks, which will translate into higher dollar figures upon the weaker greenback. A boost in the dollar could signify a global move into safe assets, which could be a negative for all stocks.
Write to Jacob Sonenshine at [email protected]