The dollar finished 2020 with bearish bets closely approaching the highest levels in a decade. The consensus trade on Wall Street was for a weaker dollar after the Fed signaled interest rates would remain near-zero through the end of 2023 and that they are ready to do more to support the economy. The Fed has been the biggest supporter of the case for fiscal policy, so with the Democrats ultimately delivering the ‘blue wave,’ they may keep policy steady going forward.
The Democratic majority in the Senate means Americans will soon see $2,000 stimulus checks and if the virus situation remains tense, prospects of additional fiscal support will grow. One of the primary arguments for a weaker dollar in 2021 is that a Democratic White House and Congress is great for economic growth globally and positive for the high-beta currencies. US debt is skyrocketing, and this fiscal path is unsustainable, but the balance sheet will grow until the US is completely on the other side of Covid.
Calls for dollar weakness should remain intact in the first half of the year as the Fed will remain ultra-accommodative until large parts of the economy return to pre-pandemic norms. The commodity currencies could outperform this year as they will see their respective central banks tighten rates well before the Fed is able to consider having discussion on when to tighten policy.
If the Biden administration is successful in fighting Covid, dollar volatility could possibly intensify in the summer if Fed members start to voice that they are ready to pare bond purchases.