US: Vaccination campaign and rising bond yield makes USD more appealing – CE

FXStreet reports that economists at Capital Economics discuss the prospects of the US dollar.

“The dollar’s rebound is not all that surprising. The pace of its decline, especially since the start of November, was close to the fastest on record. And speculative positioning against the dollar is near record levels. This suggests the scope for it to fall further in the near-term is limited.”

“More than 10% of Americans have now received a first vaccine dose, a significantly faster pace of vaccine rollout than any other major economy aside from the UK. To the extent that this divergence continues, it could help the dollar rally further. And expectations about the relative pace of monetary policy normalisation in the US and the rest of the world might shift in favour of the dollar.”

“Currency performance has been closely linked to the relative changes in long-term government bond yields since the start of the year. The currencies of economies where yields have kept pace with those in the US have not lost much ground against the dollar. But the yen and the euro have suffered, as bond yields there have not risen much. Of course, this pattern may not last. But if US yields continue to edge up and those in Europe and Japan lag, that would challenge our forecast that the euro and the yen will appreciate against the dollar this year.”