USD strength could persist into 2022 – Wells Fargo

According to analysts at Wells Fargo, with global growth still trending softer and the Federal Reserve likely to taper asset purchases in the near future, the dollar can broadly strengthen through the end of this year. They believe the dollar’s strength could persist into early 2022.

Key Quotes: 

“The external environment we highlighted above should, in our view, be conducive to U.S. dollar strength through at least the end of this year. We believe a decelerating global economy that is still facing serious and potentially longer-term risks, should attract safe-haven capital flows toward the U.S. dollar. As safe-haven flows hit the U.S. dollar, we expect most G10 currencies to weaken, with some of the more risk-sensitive currencies, such as the Australian dollar, to underperform.”

“Also supporting our view for short-term dollar strength is an elevated likelihood the Fed officially announces a decision to taper asset purchases in the near future. Given recent commentary from Fed Chair Powell and other FOMC members, we believe a taper announcement could take place as early as November and for the actual reduction in asset purchases to begin in December.”

“Tighter Fed monetary policy in 2022 and slower policy tightening from foreign central banks could result in a stronger greenback into early next year as well. For now, we believe the U.S. dollar will revert to a weaker trend over the longer term; however, given recent developments, that longer-term outlook is also evolving and the greenback's performance could be more mixed. We still expect U.S. dollar softness against many foreign currencies, but also see increasing potential for U.S. dollar resilience against several foreign currencies based on country-specific fundamentals.”