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Investing.com - The U.S. dollar is headed for its first weekly gain since mid-March, and Capital Economics think the worst may be over for the world’s reserve currency.
At 08:40 ET (12:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, climbed 0.2% to 99.385, after a sharp rebound from a three-year low in the previous session.
“We suspect the U.S. dollar will recover some lost ground over the coming months as its usual relationship with rate differentials reasserts itself,” said analysts at Capital Economics in a note, dated April 25.
The greenback’s fall over recent months, and particularly since “Liberation Day” runs contrary to economic theory and the experience of the 2018-19 U.S.-China trade war, both of which had suggested that the imposition of tariffs should cause the dollar to strengthen.
What’s more unusual is that the dollar has declined since “Liberation Day” even as yield differentials have moved in its favor, the economics group said.
Dislocation in bond markets and a wider loss of confidence in the U.S. exceptionalism narrative, driven by the mercurial nature of policy making, are probably the main factors contributing to a breakdown of usual patterns and consequent weakness in the dollar.
However, in the near term, we expected the U.S. dollar to rebound a bit as interest rate differentials move back in its favor.
While the Trump administration’s unconventional approach across a range of policy areas will probably cause some longer-lasting confidence to the U.S. as a safe haven, Capital Economics said, a lack of credible alternatives to the dollar means that it is likely to remain central to the global financial system - and be the world’s major reserve currency - for some time to come.