bond yields, particularly after adjusting for inflation. This flow is likely to be magnified by the abundance of liquidity in the U.S.

U.S.-dollar declines are associated with global economic expansions as capital is redirected abroad in search of higher returns. The currency remains overvalued based on purchasing power parity models even after last year’s decline, and other long-term factors continue to suggest that more weakness lies ahead. dollar is still in the early stages of a longer-term bear market (Exhibit 4). The greenback’s gain this year, however small, has therefore felt larger than the actual 2.6% rally. Source: Bloomberg, RBC GAMįor most of 2020, the influence of a falling dollar was reflected in generally rising prices for commodities and other risky assets, and at the end of last year, a consensus had formed that the dollar had further to fall. Note: USD index comprised of DXY index prior to 2015 and BBDXY from 2015 onwards. Source: Bloomberg, RBC GAMĮxhibit 3: Low volatility in U.S.

Source: Bloomberg, RBC GAMĮxhibit 2: U.S. Exhibit 1: Unusually tight ranges in 2021 dollar (exhibits 2 and 3) is particularly tight and results in a less active foreign-exchange market given that fluctuations in the greenback are important in dictating how other currencies perform. It is not unusual for currencies to fluctuate by at least 15% in a given year, and yet most currencies are posting ranges that are much smaller than that so far in 2021 (Exhibit 1). dollar has rallied by 2.6% against a basket of developed-market currencies since the beginning of the year, which is notable for the fact that the gain has been so small.

We have tempered our optimism on the low-yielding euro, and remain positive on commodity currencies and those for which central banks are raising interest rates. However, gains against the dollar over the next year are unlikely to be as broad-based as they were over the past 18 months. The greenback is still in the early stages of a multi-year downtrend, and this year’s resilience stems largely from short-term factors that will likely fade over the coming months. dollar has not swayed us from our bearish outlook.

Currency outlook 2021