The US dollar remains at the top of the G10 for 2021 after coming back in the second half



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The US dollar maintained an annual advance in the G10 quota of major currencies during the last day of trading for 2021 after a comeback that was triggered by the June change in monetary policy of the remaining Federal Reserve (Fed). in the foreground for financial markets as the new year approaches.

Dollar exchange rates were mixed on Friday after the greenback made modest gains against the Japanese yen, but otherwise gave way to the rest of the contingent of major G10 currencies, including the pound, allowing the rate for the dollar to rise temporarily above 1.35.

Elsewhere, the greenback was higher against the Polish zloty, Turkish lira and Russian ruble, but fell more than half a percent against the Chinese renminbi, pushing the USD / CNH exchange rate down in below 6.35 and to its 2021 low at 6.3322.

The above-mentioned gains took USD / CNH’s 2021 decline to -2.5% and made the Chinese Renminbi the best performing of all currencies for the year except the Canadian dollar. which is even close to equaling it.

“Today is the last day of 2021, and with no major market drivers yesterday, and no major events scheduled for today, we expect calm business activity,” said Charalambos Pissouros, head of research at JFD Group.


Performance in USD in 2021

Above: The performance of the US dollar against G10 currencies in 2021. Source: Pound Sterling Live.

  • GBP / USD reference rate at publication:
    Point: 1.3475
  • High bank rates (indicative band): 1.3103-1.3198
  • Payment specialists tariffs (indicative band): 1.3381-1.3410
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“The divergence in monetary policies can be one of the main drivers of the forex market. Currencies whose central banks are expected to continue to tighten aggressively should perform better, ”Pissouros said in a Friday note to clients.

With few exceptions, the dollar has swept through the opposition council since June, when the Federal Reserve first signaled it was beginning to consider a possible winding-up of its massive $ 120 billion quantitative easing program. and a future decision to start raising its interest rate.

A plan for this notional reduction in the bond buying program has since been announced and was then accelerated between early November and late December, while this month the Fed also warned financial markets that rates are interest could increase as early as March of next year.

“The United States has left the pandemic shock behind, while Europe is lagging far behind. This difference will become increasingly apparent in 2022, ”says Athanasios Vamvakidis, Head of FX Strategy at BofA Global Research.

“The very loose stance of fiscal policy, in relative terms, could force the Fed to tighten policies more than other G10 central banks,” Vamvakidis and colleagues wrote in a briefing setting out their views for the coming year.


GBPUSD and USD index

Above: US dollar index displayed at daily intervals alongside the pound-dollar rate.

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The Fed is expected to take until June 2022 to end its bond buying program, with interest rates expected to stay close to zero for some time afterwards, and in any case for as long as it takes for the Fed. economy to return to pre-pandemic employment levels.

However, the December policy decision saw the Fed announce a plan to complete the reduction process in March 2022 and was also accompanied by new economic forecasts suggesting that the Fed Funds interest rate could increase by up to three times. next year, from March or April.

“The Fed’s change has been partly incorporated, but we believe markets may still underestimate the timing and pace of fund rate hikes (our economists now expect a first rate hike in March) “said Zach Pandl, co-head of global exchange. strategy at Goldman Sachs.

“Our forecast still calls for the dollar to stagnate through 2022 due to healthy global growth and rate hikes from other central banks (eg Bank of Canada) keeping pace with the Fed. But in the near term, we expect the dollar’s strength to continue, ”Pandl and colleagues said in a late-December research note.

The Fed’s policy fulcrum followed official statistics which showed US inflation soared to over 6% in October and November, as the prices of many goods and services continued to be high by the US. pandemic-related disruptions in supply chains and other factors.


USD Index

Above: Dollar Index displayed at weekly intervals with Fall 2020 Fibonacci retracements indicating likely areas of technical resistance with any rally.


It marks a sharp yet timely turnaround from the policy stance taken by the Fed in December 2020 and maintained by the bank until June, a stance that aimed to maintain an unusually stimulating monetary policy until certain preconditions regarding employment and inflation are met. .

“The most relevant source of the USD’s supremacy will likely remain the Fed’s continued exit from emergency levels of political accommodation,” said Dominic Bunning, European head of currency research at HSBC.

“On the flip side of this equation are the euro and the ECB where we believe the political contrast with the Fed will remain very apparent until 2022,” Bunning and colleagues wrote in an overview of their 2022 forecast.

The Fed had previously wanted to see “further substantial progress” towards the “maximum employment and price stability targets” of the bank’s Federal Open Market Committee before even considering reducing monetary support to the US economy. .

However, the number of officially unemployed rose from 10.7 million to 6.9 million between December 2020 and November 2021 while the number of people whose jobs were temporarily disrupted by the pandemic rose from 15.8 million to 3.6 million.

Meanwhile, and since December 2020, U.S. inflation has suffered a growing overshoot of the Fed’s 2% average target and has played a key role in prompting the FOMC to consider the idea of ​​raising rates. American interest.

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