Measured Dollar (USD) Gains as Markets Monitor Global Rebound

Barclays expects that the global economic recovery will strengthen over the next year with supportive fiscal and monetary policies.

There will, however, be potential disruption if inflation is not transitory. Overall, the bank also expects that the dollar will not be weakened by stronger global growth as the Federal Reserve will shift towards a more restrictive policy.

Barclays expects the dollar to be held in relatively tight ranges as markets wait for further evidence on how long supply-side issues continue to distort activity.

“More sustained inflation would raise market expectations for Fed action to address it, especially if inflation expectations appear to be becoming entrenched.”

A more aggressive Fed stance would underpin the dollar, although Barclays notes that the US currency is still overvalued at current levels, limiting the scope for further gains.

Barclays expects the Euro-zone economy to recover strongly, but this represents a catch-up rather than genuine out-performance. The bank also expects that the ECB will keep more hawkish voices within a minority; “We expect the core of the Council to hold firm and keep policy ultra-loose for the foreseeable future.”

This expansive monetary policy will continue to limit the scope for Euro appreciation.