We expect higher US yields to lead to a stronger dollar

We think the greenback will strengthen a bit over the next couple of years as the economy in the US outperforms during the recovery from COVID-19 and government bond yields there generally rise faster than those elsewhere. In this environment, we expect the currencies of other economies where recoveries are likely to be swift and central banks relatively quick to begin normalising policy, broadly in line with market expectations, will hold up best – these include New Zealand, Norway, Czechia, Chile, and Korea. By contrast, we think the euro, the yen, the renminbi, and most other currencies in Europe and Asia will weaken as both near-term interest rates and long-term yields there rise more slowly, or not at all. Finally, we think that the currencies of several countries (including Turkey, Brazil, and Colombia) that combine shaky fiscal and/or external balance sheets with significant political uncertainty will remain under pressure – and that South Africa may eventually join that club as the next ANC leadership contest at the end of 2022 draws closer.