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gt.io
Date:
5th Sep 2020
Author:
gt.io

Why the US Dollar Could Continue to Decline

On September 1, 2020, leveraged forex traders globally pushed the US Dollar to a new round of lows. The US Dollar Index (DXY), which measures the value of the greenback against six major currencies, dropped below the level of 92.0 for the first time since May 2018. As of September 3, the DXY saw little change at 92.8, even with an upbeat ISM Manufacturing PMI report. 

After moving to a three-and-a-half year high in March 2020, the world’s reserve currency has been on a steady decline since May 2020, when economies around the world started to re-open. Economists believe that this decline in the USD is just the beginning of a larger structural downtrend, which will continue for the long term. Goldman Sachs analysts predicted in June 2020 that the USD could drop to a level of 84, falling more than 20% from its peak and its lowest in 5 years.

Forex and cryptocurrency traders could take the Dollar weakness as a sign of slower than anticipated global economic recovery. The Dollar decline and rise in volatility could heighten the need for portfolio diversification.

Here are some reasons why analysts think that the Dollar is poised for a continuing downturn.
 
The US Dollar has continued to decline through summer, as premature re-openings brought in a second wave of coronavirus cases in the US. The United States has the highest Covid-19 case load in the world, with more than 6 million cases and 185K deaths, as of September 3. Compared to other nations, it has been unable to control the infection rate, while the US administration’s reluctance to cooperate with the WHO, mid-pandemic, has left investors sceptical about the future.

All this paints a grim picture for US economic recovery. In its initial summary, released in July 2020, the IMF predicted 6.6% GDP contraction for the US, on a YoY basis, and only 3.9% growth in 2021.
 
xBearish leveraged forex traders expect the Dollar to depreciate further, due to stronger economic recovery outside the US and ultra-low US Fed interest rates. In August, the US Fed presented a revamped policy outlook that stressed more on combating unemployment and less on inflation targeting. This means that the Fed will allow the period of high inflation to continue for some time. 

Since US inflation has been below the 2% level for years, with low unemployment levels, the strategy shows that policy makers are unlikely to think about raising rates for a long time to come, unless the inflation target overshoots 2%. This would translate into US Dollar depreciation.
 
The US Federal Reserve is clearly concerned that its tools to fight recession are not enough in a global scenario, where both interest rates and inflation rates are so low. It has resorted to massive asset purchases and Dollar printing, which has led to multi-trillion Dollars’ worth of US deficit. Amidst talks of a possible second Covid-19 stimulus package, the federal budget deficit is expected to reach $3.3 trillion.

This means that the US federal debt could exceed its annual GDP in 2021, something not seen since WWII. Economists are concerned that rising deficit levels will put a drag on the US economy for many years to come. Servicing the debt under higher interest rates will be bad for the budget, which is why the US Fed will keep interest rates low for years to stabilise the credit markets.
 
Forex and cryptocurrency investors are expecting a surge in the value of gold and bitcoin, and decline in the US Dollar index, as the market expects Joe Biden to win the 2020 presidential elections. A Trump victory could lead to a gold price correction and huge stock market surges. Either way, political uncertainty, coupled with the Covid-19 crisis, could lead to investors flocking to safe-haven assets not related to any country, such as BTC and gold. 

While Dollar weakness over the long-term could spell trouble for US economic growth, for corporate America this means increased competitiveness in the international markets. This would also hold true for oil and gold companies.