US dollar to depreciate once yield spread against the rest of the world stabilises – Natixis

The starting point for the dollar’s coming exchange rate dynamics is the prospect of higher growth in the United States than in the eurozone, in particular thanks to the extreme fiscal expansion being implemented in the US. Initially, this will increase global demand for dollars and lead the dollar to appreciate. But then, the appearance of excess supply of dollars held by the rest of the world will lead the dollar to depreciate, as reported by Natixis.

Key quotes 

“The strong expected growth in the US is visibly driving up US long-term interest rates. This has resulted in an increase in international demand for dollars, which has led to an appreciation of the dollar in the most recent period. Then, dollar long-term interest rates will stabilise, leading also to a stabilisation of international demand for dollars. Yet the sharp growth in US domestic demand will lead to a significant deterioration in US foreign trade.”

“There will be excess supply of dollars to be held by non-residents, leading to the prospect of a depreciation of the dollar once the yield spread between the United States and the rest of the world stabilises.”

“As long as the dollar’s interest rate is rising, demand for dollars expressed in foreign currencies will rise at a constant exchange rate, balancing the increase in the supply of dollars.”

“Once the dollar’s interest rate has stabilised, the only way to increase non-resident demand for dollars expressed in dollars, when it is stable expressed in the rest of the world’s currencies, is a depreciation of the dollar.”