After a rough few months, the US dollar has started to bounce back against major currencies.
The dollar index, which tracks the greenback against a basket of currencies, is up about 3% since early May when it dipped to 92.11.
And the dollar may have more room to go this year and next, as investors factor in a more active Federal Reserve and better performing economy.
“The US dollar has now erased more than a third of its loss against other ‘major’ currencies … We expect the rest to be wiped out in due course and the greenback to make further gains through end-2017,” wrote Capital Economics’ John Higgins in a note to clients.
As for why that’s the case, Higgins says the main reason is that the Fed will start to stand out from other central banks as it raises interest rates more aggressively than its counterparts.
“Not only do we expect the Fed itself to tighten by more than others envisage as US inflation picks up, but the reluctance of the US to condone currency intervention by others will also heap pressure on those loosen policy further,” he wrote.
And he’s not the only one who thinks the dollar is just getting warmed up. Similarly, a team from Deutsche Bank argued that the US currency is looking pretty cheap right now.
“We believe we have seen the lows for the year,” the team wrote in a research note. “We still see the Fed as an important market driver and do not believe the dollar up-cycle is over. We remain dollar bulls, particularly against Asia and China FX.”
Notably, some of the dollar’s recent strengthening has been attributed to moderating worries about the US economic outlook — especially after some good economic data and the Fed’s slightly hawkish posture in the April minutes.
Or, as Barclays’ Mitul Kotecha worded it in a recent client note: “Indeed, the USD’s recovery in recent weeks may be a reflection of a market that had priced in too much negativity with regard to the US economy and interest rate outlook.”
The dollar index is little changed at 92.26 as of 4:08 p.m. ET.