Will vaccine hesitancy be a headwind for the US?

Vaccine hesitancy can occur for many reasons: health fears, lack of concern about Covid-19, racial factors, barriers to keeping appointments, and more. 

Some degree of vaccine hesitancy is everywhere, but it tends to be greater in the US than most other places, and often by a considerable margin. If we look at the numbers being vaccinated, it is quite clear now that things are leveling off in the US at a time when vaccination rates elsewhere are still rising. 

Vaccine hesitancy can occur for many reasons: health fears, lack of concern about Covid-19, racial factors, barriers to keeping appointments, and more. We’d expect such hesitancy to be geographically spread around, hopefully meaning limit ed regional discrepancy and low rates of infection overall. However, Mr. Steve Barrow, Head of Standard Bank G10 Strategy said, in the US, it seems a little different when it comes to the geographical dispersion of vaccine hesitancy, much of it to do with politics. In short, there’s a red/blue divide as blue (Democrat) states report high vaccine take-up while red (Republican) states show much lower vaccination rates and much greater vaccine resistance. For example, some 50.9% of eligible Americans have been fully vaccinated. But that national average belies the fact that coverage is much lower in the Republican-held states. We put the figure here at around 42%. What’s more, one-in-five Republican supporters say that they won’t take a vaccine, compared to just 5% of Democrats. 

As President Biden says, the US has a pandemic crisis of the unvaccinated. The government is taking more steps to try to force vaccinations on people, often under the guise of public safety, such as the recent instruction that nursing home staff require vaccination, or their employers could lose funding. But what if the Republican-supporting 20% continue to refuse to get a shot? And what if that causes serious problems in the states where Republicans dominate? It is not at all clear that Republican leaders are working overtime to make sure that their supporters get a jab. This, plus stubborn resistance from Republican supporters (and some Democrats, of course) could mean that the US falls further behind in the race to get its population vaccinated. 

Could the above situation have a negative bearing on the dollar and other US assets? Mr. Steve Barrow said, much here would seem to depend on whether this is viewed by the FX market as more of a local problem in the US, which could lead to a weaker dollar, or a global issue that lifts risk aversion and strengthens the dollar given its ‘safe asset’ attributes. Right now, risk aversion has increased as the Delta variant has spread but it is not really the US that is taking the brunt. That’s being carried by countries that are seeing cases rise fast (like Australia) or new outbreaks occur (as in NZ). As a result, the dollar is strengthening and that may continue. But what happens over the long term once risk aversion has fallen back? If the US continues to show a flatline for its vaccination trend, as (primarily Republican) vaccine doubters dig their heels in, while other countries continue to rise, it is almost bound to create economic discrepancies. 

The US economic recovery, which was seen by many to be just about the most forceful and dynamic around might suddenly start to lose its luster and, with it the confidence of the dollar bulls. “We’ve seen the UK and eurozone grow far faster than the US in Q2 and, while some slowdown seems to be coming globally, we could find that the US slows more than many. If this scenario comes to pass the dollar could slip back. Not just because the US economy performs poorly relative to many others, but also because it could push back expectations about Fed tightening and so lift non-dollar currencies as risk aversion slips back. The bottom line is that this red/blue divide in the US does create a problem that we don’t see elsewhere and one, in our view, that could ultimately stop the dollar from rising too far on this current bout of strength and could generate some weakness over the longer term”, Mr. Steve Barrow said.