There is a narrative in markets that the US dollar is on its way to losing its place as the world’s reserve currency. This view has been supported by a dramatic decline in the dollar last year relative to virtually every currency and asset. However, beginning this year- we at FXDD were among the few strategists warning our readers that this dollar decline couldn’t continue (in trade-weighted dollar terms). This view has played out well so far, particularly in EURUSD. Below, we show one of the primary reasons this has held up:

Above, we show consensus estimates for GDP growth for major economies. What we can see above is that the US is expected to grow the most consistently in 2021. This expected economic growth is fueling expected returns on assets relative to other countries. We can see this in our measure of US asset average expected returns, a measure which coincides strongly with the dollar index:

As the US economy continues to outperform other economies, the dollar will rally. This will be particularly against currencies of countries that underperform relative to the US. At this junction, it’s important to remember that there are strong reasons why the dollar is the world’s reserve currency- it is supported by a dynamic and profitable economy with deep financial markets. When choosing short dollar expressions, we need to be careful in choosing countries that can outperform the US, a fairly high bar.