As we enter a new quarter, the dollar anticipates strong US growth and a story on how much of Joe Biden’s $2.2 trillion infrastructure bill makes it through Congress by July 4th. With US headline inflation expected to rise to 3.5-4.0% this quarter, the Fed will be under pressure to reduce monetary accommodation in the coming months. The long end of the bond market will continue to bear the brunt of the pressure, and it appears that risk assets will experience periodic bouts of correction as 10-year Treasury yields search for their “right” level, which may be around 2%.
To counteract the strong dollar narrative, we need to see appealing opportunities abroad, especially in Europe. Simply put, this has not been the case. Overnight, the Governor of the Banque de France said that “pace is our collective handicap” in Europe, referring to the European Union’s EUR 750 billion stimulus plan being held up in German constitutional courts. Clearly, this must be resolved as soon as possible. It will be difficult to argue against dollar exceptionalism before Europe introduces its fiscal stimulus and, more significantly, makes progress on vaccinations.