USD set to remain on front foot in coming months – Rabobank

“Due to its widespread use outside the borders of the US, the fundamentals of the USD are far more complex than that of any other currency,” note Rabobank analysts. 

Key quotes

“Heavy use of the USD as an invoicing currency worldwide means that it continues to dominate the global payments system.  According to the BIS, at least half of cross-border transactions are invoiced in the USD.  This accounts for the fact that while the US’ share of global trade has dropped in recent decades, the USD has retained its dominant position as a reserve currency, making up around 66% of the total.”

“In emerging markets, the appeal of the USD has translated into a steady increase in the amount of USD denominated debt, with issuance levels maintained through 2020.   Additionally, many households in emerging markets hoard dollars as protection against volatile local currencies.”

“Estimates from the Fed suggest that around 60% of all US banknotes in circulation are held outside the US.  In this instance, the greenback acts more like an asset than a currency with its value a function of the sheer depth and liquidity of USD markets.  These examples underpin our view that, unlike other currencies, the outlook for the USD is driven more by its own fundamentals than those of its issuing country.  This perception remains central to our forecasts for the USD and contributes to our view that the greenback is set to remain on the front foot in the coming months.” 

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