Let’s start with the conclusion – the U.S. Dollar is seen much lower across the board in 2021. This is not just the market participant’s consensus, but it represents the overwhelming opinion of the vast majority of people involved in financial markets.
Obviously, it is not. Even though the dollar is stretched at this time of the year and will likely remain so, we should have learned something by now from 2020 – no year is like the other, and surprises or exogenous factors can easily change trends.
Overwhelming 2021 Consensus
As mentioned earlier, the key element for the FX market in 2021 is a weak dollar. The argument for an even lower dollar comes from it losing its key advantages in 2020 – high yield and U.S. economic growth outperformance.
One of the direct consequences of a lower dollar is a rise in the price of gold. If we use the U.S. long-term interest rates as a benchmark, their limited downside potential suggests the price of gold may give another shot at a new all-time high.
If the American dollar is expected to depreciate, what are the currencies that will do the opposite? Remember, an exchange rate reflects the value of one currency in terms of another. In other words, if one currency appreciates, another must do the opposite.
The Chinese Yuan is one currency that may appreciate against the dollar. There is a huge interest rate differential between China and the United States and, judging by what the Fed signaled yesterday, the gap is unlikely to be filled anytime soon.
Emerging markets currencies will also do well in an environment dominated by a cheaper dollar. That is particularly true for currencies of oil-rich countries that would benefit from higher crude-oil prices, too, given that they are denominated in dollars.
No matter how we turn this around, it all comes back to the dollar. Why?
Put it simply, over 30% of all dollars ever created appeared in 2020. The Fed printed like no other central bank as it is its duty to keep the financial system afloat. This is the main reason why the overwhelming consensus sees a lower dollar in 2021.
On the other hand, with so few disputing the central narrative, being a contrarian may pay handsomely.