But recently, as turmoil has rocked global bond markets, the dollar has jumped. It’s now strengthened by roughly 2.4% this year against a basket of other major currencies.
One reason: Investors are taking stock of the global recovery, and have become increasingly confident there will be a burst of activity in the United States later this year as vaccination campaigns pick up steam. The same can’t be said for many other big economies.
That divergence is helpful for King Dollar, TD Securities currency strategist Ned Rumpeltin told me. While the currency tends to weaken during periods of loose financial conditions, as well as when there are expectations of synchronized global growth, it usually appreciates when the US economy is looking better than its major counterparts.
“Let’s face it: Europe is dragging behind,” Rumpeltin said. “The US is simply doing a better job rolling out the vaccine.” That’s become a “differentiating factor,” he added.
The euro has fallen back 2.6% against the US dollar since the start of the year.
This gap is reflected in estimates for growth in 2021. The Organization for Economic Cooperation and Development projected this week that the US economy would grow 6.5% this year, while the 19 countries that use the euro would see a more muted expansion of 3.9%.
On Tuesday, Morgan Stanley upgraded its forecast for the US economy to 7.3% growth in 2021, an increase of 0.8 percentage points.
“Reopening is progressing, the rate of vaccinations is ramping up, and the labor market is gaining momentum,” chief US economist Ellen Zentner said in a note to clients.
That said: Analysts still think the dollar will maintain a weaker trajectory over the medium term, with the Federal Reserve due to remain dovish. That means it will keep printing money to fund asset purchases, putting pressure on the currency, Mark Haefele, chief investment officer at UBS Global Wealth Management, observed.
“Greenback gains [are] likely to prove temporary,” he said in a research note this week.
Haefele also thinks Europe can play catchup, helping the euro’s relative performance improve.
“As vaccination programs gain more momentum globally, the appreciation of the euro, the Swiss franc and several emerging market currencies … should be more pronounced,” he said.
Wall Street is getting whiplash as Tesla and tech surge
One day after Wall Street sent the tech-heavy Nasdaq Composite into a correction, the index experienced a massive rebound.
The massive rally follows a sharp selloff in recent days. Investors have been worried that the recovering economy would mean stocks that performed well during 2020 had run their course. They’ve been shifting their money to shares that tend to perform well when the economic cycle picks up.
“The cyclical rotation has been running strong for months and [Tuesday] is an overdue buying-the-dip for technology stocks,” Oanda analyst Edward Moya said in a note to clients.
The S&P 500 is currently trading at more than 21 times earnings estimates for the next 12 months, according to FactSet data. That’s above the five-year average of just under 18 and the 10-year average of nearly 16.
It’s also approaching the peak March 2000 levels of 24 times earnings estimates. In other words, the market is priced for perfection — leaving little room for error.
$1,400 stimulus checks could be arriving very soon
President Joe Biden’s $1.9 trillion stimulus package is expected to pass Congress on Wednesday, clearing the way for the legislation to quickly become law.
It’s possible that tax filing season, which is currently underway, could slow the process. But Press Secretary Jen Psaki has said the Biden administration is doing everything it can “to expedite the payments and not delay them,” and will leave the president’s name off the checks to speed up the process.
Big picture: These checks are expected to reach about 90% of families, fueling a surge in demand for goods and services in the United States. But there are also concerns that direct payments, combined with other parts of the massive stimulus package, could trigger a worrying leap in prices later this year.
Much hinges on the answer to this question: Will checks be spent quickly or saved? As with earlier rounds of payments, this may be income dependent. Harvard University researchers have found that checks significantly increase spending among lower-income households, while changes to spending among higher-income households have been more limited.
Also today: The latest Consumer Price Index, a key measure of inflation, posts at 8:30 a.m. ET.
Coming tomorrow: The European Central Bank announces its latest policy decision as it monitors volatility in the bond market.