The greenback is down more than 1% against the currencies of its
biggest trading partners so far in April. Before a slight rise Friday
morning, the dollar had seen its worst seven-day losing streak since
December. The fall in the greenback interrupts a rally so far this year.
The dollar‘s weakness is unlikely to last because the U.S. economy is
expected to outpace others. Right now, the U.S. is expected to grow
about 2 percentage points more than the eurozone in the year ahead. The
gap hasn’t been that large since early 2017, when the dollar was much
stronger against the euro: Back then, $1 bought about €0.94, whereas now
it buys €0.84.
According to the International Monetary Fund, the U.S. is well placed
not only return to, but also to exceed its pre-pandemic growth rate this
year.But its a different story in the eurozone, one of the biggest
differences between the U.S. and the bloc is that the economic setback
last year was much higher in the euro area. Whereas the U.S. economy
contracted by 3.5%, the euro zone economy shrunk by almost twice as
much.
Given how deep the shock was for them last year, euro nations will
naturally struggle more to recover in 2021. Its GDP is seen expanding by
4.4% this year, while U.S. growth is expected to reach 6.4%. The latest
vaccination data shows that the total number of doses administered per
100 people in their respective populations is much higher in the U.S.
than in the EU. The share of the total U.S. population that has received
at least one vaccine dose is just above 30% currently.
There tends to be bad economic surprises in April because of a recent
history of winter weakness. But the dollar has fallen this month despite
some strong economic data. That might be due to the fact that Covid-19
and the sudden shutdown of the economy last year has made this years
economic indicators more difficult to set in context.
A broader economic recovery would extend the long-term trend of a move
out of dollars by global asset managers, and particularly central banks
that manage large foreign-currency reserves. The share of dollars held
by reserve managers has declined steadily over the past two decades and
recently fell below 60% of their total assets for the first time since
the mid-1990s.
Other foreign investors, led by Japanese banks, have also been selling
Treasurys as money managers grapple with the outlook for inflation and
interest rates in the U.S. That has led to sharp gains in U.S. yields.
Japanese investors mostly hedge their currency exposure when buying U.S.
bonds, which should limit the impact on the dollar. However, the rise
in Treasury yields ought to attract more funds back to the U.S. markets,
according to some investors, hence strengthening the dollar.
