The dollar looks set to snap a three-week win streak Friday, and while analysts are expecting short-term gains to resume, the longer-term outlook for the greenback is less convincing.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.10% to 92.17.
“In the coming weeks, the dollar is more likely to gain on account of the strong recovery of the US economy. However, it is likely to weaken again versus the euro in the second half of the year,” Commerzbank (DE: CBKG) said.
The gloomy outlook on the dollar comes as investors are reining in their bets on inflation spiraling out of control and the Fed acting sooner-than-expected.
The injection of further monetary policy from President Joe Biden’s infrastructure plan could prove as another potential source of weakness for the greenback.
The further stimulus would “not be the magic formula with which to boost the US economy … rather, it would only trigger a short- to medium-term artificial boom, which is too obviously finite for the FX market to be seduced by it in the long term,” Commerzbank added.
In the short-term, however, there is room for the dollar to ride on the coattails of Treasury yields.
“Our rates team is expecting UST yields to be back on the rise next week: in FX, this may imply that the dollar can recover some ground to low-yielders,” ING said in a note.