Please summarize the following article in financial perspective

Buttonwood Winter's tale ger dollar. How America's blockbuster stimulus affects the dollar ERE IS THE tale of the dollar so far in to ease the dollar shortage. Then, over the rest of the year, the dollar declined, as risk clining trend. A lot of people were mildly appetite revived. chary of its prospects. The gist was that The greenback's bounce-back this year people had bought a lot of dollars last is more about interest-rate differentials. year. They might wish to sell some. There Here the story gets a little frayed. The has since been a dramatic upward revi- interest rates that you would normally sion to forecasts for GDP growth in Amer- think of as mattering for speculative ica. This has been mirrored in sharply currency flows are short-term rates. But rising Treasury yields. Growth upgrades; central banks are not for moving those higher interest rates; both are good for soon. So bond yields have become a signi- currencies. The result has been a stron- fier, since they in part reflect the as-yet- distant tremors of moves in future short- It is not sufficient for a strong dollar term rates. Bond yields in turn are respon- that America does well; others must also ding to growth expectations. The dollar be doing badly. "If the us economy grows responds by moving higher. incredibly fast and nowhere else does, After all, what currency would you the dollar will go up," is how Kit Juckes of swap it for-the euro? America's economy Socit Gnrale, a bank, puts it. The is roaring back, while much of euro-land question is: can it keep going up and for remains closed, and the distribution of how long? The dollar usually provokes vaccines has been (how to put it char- strong feelings in the currency fraternity. itably?) sluggish. You can make a case that It is either loved or hated. That is not the the Federal Reserve will have to tighten case now, which is remarkable. There monetary policy sooner than it thinks. But may be a strong-dollar story. But there is the European Central Bank looks set to no really strong story about the dollar. keep interest rates near zero indefinitely. To understand why, consider first the The same goes for the Bank of Japan. important drivers of currency moves: trade flows, relative interest rates and risk appetite. Trade flows track the un- Whistling DXY derlying demand for a currency. If do- US dollar trade-weighted exchange rate mestic interest rates rise relative to Against a basket of major currencies, March 1973=100 foreign ones, that attracts speculative 105 capital inwards, supporting a currency. Shifts in risk appetite can overwhelm these fundamentals. Indeed that was the 100 story in 2020. Last March, when sudden- ly the priority was to have cash, the cash 95 that people wanted was dollars. The DXY index, a weighted average of the dollar's 90 exchange rate against six other widely traded currencies, rose sharply in mid- March, as covid-19 panicked markets. 85 The Federal Reserve responded by open- 2017 21 ing swap lines with other central banks Source: Bloomberg Britain's vaccination programme has been a success, which helps explain the rising pound. But Britain remains locked down and its economy is still suffering. Rising crude prices have pushed up the currencies of big oil producers, such as Canada and Norway. But beyond these, there are few currencies you might prefer over the greenback. The dollar seems likely to rise a bit further in the near term. There are a lot of stale short-dollar positions," says George Papamarkakis of North Asset Management, a hedge fund. Speculators who have a bearish view of the dollar have already sold it short. If the currency keeps rising, they may be forced to buy it back. Another factor in the dollar's fa- vour is that risk appetite is less ravenous than it was. Equity markets are choppy. The dollar might be the least-worst place to sit out the volatility. And if the fi- nancial markets suffer a full-scale tan- trum, the greenback could benefit from a flight to safety. Later in the year, though, there is a case for a mildly weaker dollar. A big part of that story is that a booming American economy will lead to a wider trade def- icit: strong demand in America will spur activity elsewhere. Asia is already doing well. Europe is lagging but will enjoy an upswing once vaccination rates pick up. Risk-taking would then revive. "When the us is doing well, and also bringing the world with it, there are more in- teresting places for investors to put their money," says Mr Juckes. As the days grow longer, 2021 might start to look less like early 2018, when a faster pace of interest-rate increases in America drove up the dollar, and more like 2017, a year of broad global growth and a falling dollar. The story of the greenback in 2021 could yet have a twist. 18 19 20 Buttonwood Winter's tale ger dollar. How America's blockbuster stimulus affects the dollar ERE IS THE tale of the dollar so far in to ease the dollar shortage. Then, over the rest of the year, the dollar declined, as risk clining trend. A lot of people were mildly appetite revived. chary of its prospects. The gist was that The greenback's bounce-back this year people had bought a lot of dollars last is more about interest-rate differentials. year. They might wish to sell some. There Here the story gets a little frayed. The has since been a dramatic upward revi- interest rates that you would normally sion to forecasts for GDP growth in Amer- think of as mattering for speculative ica. This has been mirrored in sharply currency flows are short-term rates. But rising Treasury yields. Growth upgrades; central banks are not for moving those higher interest rates; both are good for soon. So bond yields have become a signi- currencies. The result has been a stron- fier, since they in part reflect the as-yet- distant tremors of moves in future short- It is not sufficient for a strong dollar term rates. Bond yields in turn are respon- that America does well; others must also ding to growth expectations. The dollar be doing badly. "If the us economy grows responds by moving higher. incredibly fast and nowhere else does, After all, what currency would you the dollar will go up," is how Kit Juckes of swap it for-the euro? America's economy Socit Gnrale, a bank, puts it. The is roaring back, while much of euro-land question is: can it keep going up and for remains closed, and the distribution of how long? The dollar usually provokes vaccines has been (how to put it char- strong feelings in the currency fraternity. itably?) sluggish. You can make a case that It is either loved or hated. That is not the the Federal Reserve will have to tighten case now, which is remarkable. There monetary policy sooner than it thinks. But may be a strong-dollar story. But there is the European Central Bank looks set to no really strong story about the dollar. keep interest rates near zero indefinitely. To understand why, consider first the The same goes for the Bank of Japan. important drivers of currency moves: trade flows, relative interest rates and risk appetite. Trade flows track the un- Whistling DXY derlying demand for a currency. If do- US dollar trade-weighted exchange rate mestic interest rates rise relative to Against a basket of major currencies, March 1973=100 foreign ones, that attracts speculative 105 capital inwards, supporting a currency. Shifts in risk appetite can overwhelm these fundamentals. Indeed that was the 100 story in 2020. Last March, when sudden- ly the priority was to have cash, the cash 95 that people wanted was dollars. The DXY index, a weighted average of the dollar's 90 exchange rate against six other widely traded currencies, rose sharply in mid- March, as covid-19 panicked markets. 85 The Federal Reserve responded by open- 2017 21 ing swap lines with other central banks Source: Bloomberg Britain's vaccination programme has been a success, which helps explain the rising pound. But Britain remains locked down and its economy is still suffering. Rising crude prices have pushed up the currencies of big oil producers, such as Canada and Norway. But beyond these, there are few currencies you might prefer over the greenback. The dollar seems likely to rise a bit further in the near term. There are a lot of stale short-dollar positions," says George Papamarkakis of North Asset Management, a hedge fund. Speculators who have a bearish view of the dollar have already sold it short. If the currency keeps rising, they may be forced to buy it back. Another factor in the dollar's fa- vour is that risk appetite is less ravenous than it was. Equity markets are choppy. The dollar might be the least-worst place to sit out the volatility. And if the fi- nancial markets suffer a full-scale tan- trum, the greenback could benefit from a flight to safety. Later in the year, though, there is a case for a mildly weaker dollar. A big part of that story is that a booming American economy will lead to a wider trade def- icit: strong demand in America will spur activity elsewhere. Asia is already doing well. Europe is lagging but will enjoy an upswing once vaccination rates pick up. Risk-taking would then revive. "When the us is doing well, and also bringing the world with it, there are more in- teresting places for investors to put their money," says Mr Juckes. As the days grow longer, 2021 might start to look less like early 2018, when a faster pace of interest-rate increases in America drove up the dollar, and more like 2017, a year of broad global growth and a falling dollar. The story of the greenback in 2021 could yet have a twist. 18 19 20