Potential reasons why the Bank of America thinks that the USD will strengthen in 2021


Reports reveal that the Bank of America lifted its prediction for the strength of the US dollar against the Euro in the latter half of March 2021. After several months of weakening throughout the cursed year, 2020, there are numerous factors that support the greenback during the current months of economic recovery. 

With the fading uncertainties about the path of US dollar in 2021, bulls might ultimately have their day, as announced by Bank of America. Strategists and lawmakers led by Athanasios Vamvakidis enhanced their predictions for the American currency, foreseeing it to strengthen to 1.4 dollars per euro by the end of 2021

A higher rate of euro dollar will mean a weaker dollar as more US dollars can be bought with a single euro. The pair of currency trades at the first quarter forecast of the bank of 1.20, down from 1.24 during the start of 2021. This entire team also expects a hike in the value of the dollar during the latter half of the year and they also say there are multiple reasons behind the strengthening of the dollar. 

The Fed-ECB gap

The Federal Reserve had already taken multiple actions to pump in dollars for boosting the US economy, now they are near the end of their policy stance. There are other American officials who already begun narrowing asset purchases of the central bank. The Fed rebuffed all its concerns of tightening but the communication suggests normalization of the policy which could happen during the first quarter of 2022. 

The bottomline is that the ECB will move towards easing and the Fed will watch out towards the normalization of the policy.

Boost in stimulus

The administration led forward by Biden keeps moving towards passing its $1.9 trillion proposal for stimulus without seeking Republican support in an attempt to charge and boost the economic recovery of the US. Such a huge financial relief package has a chance of weakening the value of the dollar but it also boost the risk of policy normalization sooner by the Fed. The stimulus boost measure should support the strength of the dollar. 

Rapid growth

The global economy is anticipated to revive in 2021 with the start of the vaccination process that is being done to bring an end to the Coronavirus pandemic. Still the strategists of the Bank of America predict American growth to outpace that of the European Union. There is a projection of 7% growth in 2021 and 4.5% in the next year, surpassing the consensus calculations of 4.3% and 3.7% respectively. 

The safe haven is back

The party that uplifted stocks throughout the year will never last this year and this reversal will push more investors towards cash positions. Bank of America anticipates positioning in risk assets to reach highest level in the first quarter before policy support hits to the following quarter. There is a market correction that is being forecasted and that will shake the appetite of the stock market investors

Hence, an even more challenging and riskier outlook for assets suggests a clear picture of forex market and USD risks. UBS says that bitcoin is extremely volatile to diversify your investment portfolio, unlike gold and hence the bank thinks this could end up being a ‘worthless’ option.