Good news about the US to be the greater headwind to drive a USD reversal – HSBC

After the sell-off of the US dollar into the end of 2020, the dollar is now retracing that weakness, Notwithstanding, the USD is set to weaken further in 2021, but this trend is cyclical not structural and thus is less durable. Economists at HSBC believe a USD reversal is likely to be driven by good news about the US. 

Key quotes

“We believe USD weakness reflects greater confidence about the global economic recovery amid a COVID-19 vaccine rollout and continued accommodative policy settings from the world’s key policymakers. This is a narrative that has further to run in 2021. However, this bearish trend is cyclical rather than structural in nature, and thus is likely to be limited in scale and duration.”

“A sudden return of risk aversion is not our base case. Instead, we believe the greater headwind to the USD bear trend will come from a USD personality shift, one not driven by bad news about the global economy but by good news about the US. US cyclical strength and relatively contained economic scarring combined with an increasingly strident discussion about the merits and timing of Fed tapering should limit the scale and longevity of the USD weakening trend.”