The Dollar's Rebound May Just Be Getting Started
Emerging-market currencies look especially vulnerable as growth and relative interest rates move in the greenback’s favor.
Things are looking up for the dollar.
Photographer: Paul Yeong/Bloomberg via Getty Images
After a terrible 2020, the dollar has come roaring back this year. You’d be forgiven for thinking that strange, with U.S. inflation rates consistently coming in higher than forecast and the current-account deficit — its excess of spending over saving — ballooning. On top of that, extraordinarily loose fiscal policy has flooded the world with dollars. Then there’s the Afghanistan debacle, which has shown that the U.S. is far from the force it once was, and certainly not one to be relied upon.
Yet I don’t really see much reason to damp the enthusiasm for the currency that I articulated early this year. Currencies are relative, not absolute, prices: They are formed by economies’ relative economic merits. Currency markets are also — or should be — forward looking. The question about the dollar should thus be reframed the following way: Are economic conditions likely to favor the U.S. over its trading partners in coming months? On balance, the answer is yes. Some emerging currencies look especially very vulnerable.