Short term momentum looks positive for the USD, but structural headwinds could still undermine the dollar in H2.
Several factors, either in isolation or combined, might be needed before the market re-embraces short USD positions – a meaningful position adjustment, more assertive pushback from Fed officials around tightening/taper expectations and the rest of the world, particularly the EU, looking better. US growth upgrades have outpaced the other major developed economies by a comfortable margin in 2021 to date.
USD valuations remain unattractive though, with the twin deficits (current account and fiscal deficit), still a meaningful longer-term headwind.
The early pressure in H2 is likely to be for more upside in USD/Asia pairs, particularly with USD/CNY still showing positive upside momentum. The region is better prepared relative to the 2013 tantrum though, and we still see USD/Asia pairs correcting lower as we move further through 2H.