Money management economists and strategists expect to see plenty of activity in currency markets in 2021, forecasting a further depreciation of the U.S. dollar.
The dollar lost ground against other major currencies in 2020, falling 8.22% vs. the euro, 2.98% vs. the pound sterling and 4.94% vs. the yen.
While still a "relatively strong currency ... I think there is scope for further depreciation" of the dollar, said Nathan Sheets, Newark, N,J.-based chief economist and head of global macroeconomic research at PGIM Fixed Income. "One reason is folks were expecting U.S. monetary policy to be tighter than that in the rest of the world — I don't think (that's) the case in the next three years. So that kind of theory of dollar strength is undercut, and as a result of that I do feel that there's some more scope for dollar decline," Mr. Sheets said. He expects the euro to reach about $1.25 by year-end. The euro ended 2020 at $1.22.
UBS Asset Management executives also expect to see further weakness in the dollar "and pro-cyclical positions to benefit from increased visibility into a broad, durable global economic recovery," said Evan Brown, New York-based head of multiasset strategy.
The euro has already appreciated a fair amount, Mr. Sheets said, "partially reflecting a vote of market confidence in European policymakers."
Many financial markets players "have been relatively surprised by Europe's expeditious and convincing response (to the COVID-19 crisis) — both monetary and fiscal," Mr. Sheets said.
Emerging markets currencies are also set to benefit.
"The relative speed of recovery from global lockdowns, divergences in fiscal and monetary policy, and global risk appetite are largely in favor of EM currencies and to a lesser extent developed currencies such as the euro and yen," said Adrian F. Lee, London-based president and CIO at currency manager Adrian Lee & Partners. "The new U.S. administration's foreign policies are also potentially more supportive of global trade and EM and Asian currency in general."