US Dollar 1Q 2021 Forecast: Safe Haven Status Versus Fading Growth Position

DOLLAR STARES OVER THE TECHNICAL PRECIPICE - WILL FUNDAMENTALS SHOVE OR SAVE?

The US Dollar was staring down the barrel of a more prolific bearish trend heading into the close of 2020. Fundamentally, the slide in prominence for the Greenback reflects upon uneven growth and stimulus efforts, years of building isolationism and many investors around the world casting aside havens as even mere hedges were deemed to be too much of a burden on returns. In this shift, the very role of the most liquid currency in the financial system is at risk of further systemic alteration. Yet, that slide in international prominence would depend in part on steadfast themes carrying over from 2020 into 2021.

There is reason to believe, however, that many of these currents are likely to change - even if temporarily - with significant risk that the alterations begin in the first quarter. From a bigger picture perspective, one of the most important fundamental considerations for the USD's performance heading into the new year is whether its drive is more principally a relative fundamental shift or reversion to a more primal function. In other words, are the prospects for competitive economic activity and a higher rate of return the guiding light for the USD? Or, perhaps, a systemic collapse in sentiment is due to resuscitate the currency's safe haven appeal? The potential is palpable and yet highly variable for the open of the new year.

ECONOMIC GROWTH FORECAST INITIALLY REFLECTS THE RELATIVE CORONAVIRUS RECOVERY PATH

Should risk trends continue to point higher or otherwise maintain an inconsistent path into the coming months, the Greenback's outlook will more likely draw from its relative potential. That can prove either a comparable boon or burden for the currency, depending on how the standardized data performs. While actual economic data like the 4Q GDP and monthly PMIs (a timely proxy for official growth figures) will represent important milestones, the medium-term forecast could matter far more than immediate statistics. That is because there are critical interim developments that can drastically alter the United States' course. Following the FDA's approval of the first Covid-19 vaccine from Pfizer on December 11th, the arduous process of restoring the US economy to a state of normality began. The effort will take months, but markets are forward-looking in nature. The question is whether the perceived timetable for a return to tempo for the US keeps apace of its major counterparts.

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