AllMarket Outlook
logoArgusOctober 22, 2021

Daily Spotlight: Dollar Down from Peak

Market Outlook
Bullish - Short term

The dollar spiked early in the pandemic, as global investors flocked to the security of assets denominated in greenbacks. Indeed, the dollar last year surpassed cycle highs set initially in 2001-2002 and then again in late 2016. But since peaking in April 2020, the greenback initially declined and more recently has ticked higher -- but remains well below its peak. Currently, on a real trade-weighted basis, the dollar is 10% above the average valuation over the past 20 years, but down from a 17% overvaluation at that April peak. The fully valued U.S. currency reflects several factors, but primarily the relative strength of the U.S. economy and global investor confidence in the U.S. Federal Reserve and Department of Treasury as the world economy recovers from COVID-19. Looking ahead, we anticipate a trading range around current levels for the greenback for the balance this year and into 1H22. That's because we think U.S. GDP will start to cool from the white-hot rates of 1H21. While Congress has been aggressive with fiscal stimulus and it looks like there is more to come, at some point, traders may become wary of the high level of U.S. debt relative to GDP. Lastly, the lofty current valuation of the greenback implies that other currencies -- and even gold or other commodities -- are possibly undervalued, and traders can be expected to bid up those values over time.

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