The US dollar, which has been in a period of weakness for much of the past year, has recently rebounded against a basket of major currencies. This rebound has been driven by a combination of factors, including rising US Treasury yields, a stronger-than-expected US economic recovery, and increased demand for the dollar as a safe haven asset in the face of global uncertainty.
However, some analysts are warning that this rebound may not be sustainable, and that the dollar’s recent gains may lose momentum in the coming months. Here are some of the reasons why:
The Federal Reserve’s monetary policy stance
The Federal Reserve has signaled that it is in no rush to raise interest rates, despite rising inflationary pressures. This has put downward pressure on US Treasury yields, which have historically been a key driver of the dollar’s value. If the Fed maintains its dovish stance, it could limit the upside potential for the dollar.
The global economic recovery
While the US economy has been recovering strongly from the pandemic, other major economies, including China and Europe, are also seeing a rebound. This could lead to increased demand for other currencies, as investors seek out higher yields and returns elsewhere.
US fiscal policy
The Biden administration has proposed a $2 trillion infrastructure spending package, which could provide a boost to the US economy in the coming years. However, this spending would also increase the US budget deficit, which could weigh on the dollar’s value in the long run.
Geopolitical risks
The recent escalation of tensions between the US and China, as well as ongoing geopolitical risks in the Middle East and elsewhere, could lead to increased demand for safe haven assets like the dollar. However, these risks could also lead to increased volatility in financial markets, which could limit the dollar’s appeal.
Technical factors
Finally, some analysts point to technical factors, such as overbought conditions in the dollar’s recent rally, as evidence that the currency may be due for a correction. If this correction occurs, it could lead to a period of weakness for the dollar.
Overall, while the dollar’s recent rebound has been impressive, there are several factors that could limit its upside potential in the coming months. Investors should remain vigilant and monitor these factors closely to determine whether the dollar’s rally is sustainable or if it is due for a correction.
