US Dollar Fundamental Forecast: More Upside on Fed Bets, Safe-Haven Flows

US Dollar Fundamental Forecast: Bullish

• US Dollar benefiting from strong fundamental backdrop
• Accelerated bets on taper talks helping fuel USD Strength
• Safe-haven flows aiding Greenback as Asia battle Covid

The US Dollar finds itself in a solid fundamental position that may lead to further gains as Federal Reserve taper talk bets increase. Traders began to ramp up bets on accelerated monetary policy tightening following June’s FOMC meeting, which showed an upward revision in the Fed’s Dot Plot. Nevertheless, Fed Chair Jerome Powell has pushed back on the notion that the central bank will begin tapering soon. The dovish pushback saw investors move back into US Treasuries.

Even so, markets appear more convinced than not that a reduction of the balance sheet is now on the horizon. What remains in question, however, is when the Fed will send a tangible signal on tapering its balance sheet. If Mr. Powell’s recent language is to be taken at face value, we may still have a ways to go. Still, Friday’s upbeat US retail sales figure shows the US economic recovery remains on solid footing.

Meanwhile, the USD is also benefiting from safe-haven flows. A resurgence in Covid, driven by the highly transmissible Delta variant, through Asia is seen as a growing threat to global growth. South Korea, Australia, and Japan have seen lockdowns or other forms of social-distancing measures reintroduced. This could be driving foreign demand in the Treasury market, which would also be a tailwind for the Greenback as offshore buyers convert into Dollars to buy the US debt.

All things considered, the US Dollar is likely to continue running higher if the US economy continues to perform well, particularly while Asia battles another wave of the virus. The current global environment bodes well for the US Dollar’s continued run. Ultimately, however, the trade may become saturated and susceptible to an unwind, but for now, the rosy view remains.

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--- Written by Thomas Westwater, Analyst for DailyFX.com

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