The 2021 Outlook for the U.S. Dollar

April 14, 2021

The U.S. dollar weakened considerably during the economic chaos of 2020, falling against virtually every major international currency. As economies worldwide begin to recover and infection rates show a significant drop-off, investors with major international interests are wondering whether this year-long dip is a predictor of long-term erosion in the dollar’s value or simply a short-term dip that will recover along with the U.S. economy.

There’s cause for optimism. While there are continuing risks, the U.S. dollar should benefit from both increased overall economic activity at home and a growing interest rate differential that will attract foreign buyers. Further, continued global reliance on U.S. consumers will drive ongoing international support. Here’s why we’re optimistic about the dollar this year.

The Fed vs the ECB

While the Federal Reserve has been extremely aggressive in the past year to compensate for the struggles of the economy, it has done little to address increasing intermediate and longer-term rates. The “steepening” of the U.S. yield-curve has drawn and will continue to draw foreign buyers of U.S. bonds, which provides upward support to the dollar.

The European Central Bank, by contrast, has taken a stronger stance against euro strength. In order to meet inflation goals, we anticipate that the ECB will likely add euros to the economy. The gap in policy positions between the two banks should lead to a stronger dollar sooner rather than later.

Government Stimulus Spending

The U.S. government has passed unprecedented stimulus packages in the last year, with another multi-trillion-dollar bill signed into law this past week. While there is debate around the longer term impact of this spending, the increased activity over the next several months will help drive a smoother and quicker recovery. As this recovery turns to expansion, U.S. assets will provide more opportunity for investors than more sluggish regions.

In addition, the stimulus packages passed in the last year have been focused on replacing lost income rather than creating artificial demand. By putting the money toward individuals and small businesses, the Fed has set up the stimulus packages to minimize inflation and long-term damage to the value of the dollar. With much of the stimulus focused on job retention and direct payments, U.S. consumers should be well positioned to support a rapid reopening.

Faster Economic Growth

The economy should recover globally in 2021 as vaccine distribution spreads, but growth won’t be identical in every market. We expect the American economy to grow significantly faster than that of the EU. As the U.S. separates from the European economy, the dollar should continue to strengthen, increasing domestic investment as well as helping moderate longer-term interest rates.

Talk to First Western Trust

Allocation of your investments is always a tricky balance, and deciding between equities and currencies is another complicating factor to consider. At First Western Trust, we pride ourselves on a holistic approach to all our clients. We’ll examine every aspect of your financial portfolios, including your priorities and goals, to craft a financial plan that’s built from the ground up for you. If you’re ready to start taking investing seriously, get in touch today.