Dollar Set for Short-Term Gain, but Will Resume Long-Term Pain By

Dollar Flat as Short-Squeeze Trade Nearing End, Experts Say

© Reuters.

By Yasin Ebrahim – The dollar ended the week lower Friday, though its days in the doldrums of darkness are coming to end in the short-term as the Federal Reserve prepares to begin talking about tapering.

“The Fed minutes may end the recent phase of USD weakness for now. It is probably too little for a trend reversal,” Commerzbank (DE:) said. The bank, highlighting parallels to the previous 2013/2014 Fed taper, said that reining in bond tapering may not have an immediate boost to the dollar.

“Taper tantrum and USD appreciation were about a year apart at the time. And in retrospect, the lesson of 2013/14 should be that the two are independent decisions that do not follow each other in a fixed time interval. This is even more true under the new Fed strategy.”

Federal Reserve officials signaled it may appropriate to start discussing a plan to rein in bond purchases at upcoming meetings, according to the minutes of the Fed’s April 27-28 meeting, released Wednesday.

Others agree that the dollar is set for short-term gain, but will continue its long-term pain.

“We expect the dollar’s mild depreciation trend to become more apparent later in the year or early in 2022, as U.S. growth slows and converges with the eurozone rate. A more synchronized post-pandemic recovery should produce more balanced global growth and recovering trade, with U.S. trade deficits large and growing. Historically, this is one where the dollar falls rather than rises, so, we anticipate that the dollar’s current trading range will give way to more sustained weakness in 2022,” Wells Fargo (NYSE:) said in a note.

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