The story of 2021 on Wall Street thus far has been a story of rising stocks and rising yields, more seesaw than rollercoaster. Inflation fears rise on rising yields, and stocks, especially growth tech stocks that eat capital, fall. Inflationary fears subside as rates fall, and stocks, especially those beaten down growth tech stocks, rise. Higher bond yields and rates historically mean a stronger dollar and a weaker U.S. equities market--a bet that strategists at Goldman Sachs were counting on. (The yield on the 10-year Treasury has climbed to 1.71%, from 0.92% at the beginning of the year.)
Since October, Goldman has been bearish on the world's reserve currency, recommending to short Uncle Sam's bills against a batch of other major currencies like Australian and Canadian and New Zealand dollars, as well as the Norwegian krone. It wasn't a bad trade for the investment bank, yielding 5% since the fall. However, the greenback has shown itself to be -- in light of those rising yields mentioned earlier and a booming economic recovery --- surprisingly strong and stable. Even trillions of dollars in stimulus adding to massive debt doesn't seem to be crushing the reserve currency of choice. Since the beginning of the year, the dollar has strengthened, leading Goldman to pull the plug on its short game.
In the short term at least, strategists led by Zach Pandl say firm U.S. growth and rising bond yields may keep the greenback on firm footing.
“Accelerating European growth should help unwind some of the divergence with the U.S. priced into domestic yield curves, as well as support commodity prices and risky assets generally,” the anaysts say, as quoted by MarketWatch.
The strategists set their three-month euro/dollar forecast at $1.21 and their 12-month view at $1.28.