Market Overview

22 July 2020

Don’t Shrug Off the Dollar

The recent decline of the U.S. Dollar prompted a “mainstream” suggestion that the American currency is moving towards the underworld. For example, some expect the Euro to climb to the 1.30 level versus the Dollar. Mizuho Bank analysts suggest that the recently approved UE recovery fund worth 750 billion Euros will complement this decline as this recovery plan suggests huge EU nations’ borrowings denominated in Euros. This move will create a steady cash inflow in government bonds and may raise the demand for the Euro.

Other currencies are also strengthening against the Greenback with the crude prices and metals as risk off mood prevails in the market. The U.S. Dollar is pressured by the fresh pandemic rise in the United States as Europe, Asia and Australia have mostly contained infections, and are recovering after a critical phase of the pandemic.

A huge influx of the liquidity provided by the Federal Reserve (the Fed) and the U.S. budget is devaluing the Dollar. Together with low interest rates at 0-0.25% that is undermining the demand for U.S. Treasuries. The benchmark ten-year U.S. Treasuries’ yields fell from 1.9% at the beginning of 2020 to 0.61 in July.

All these and some other significant factors are creating enormous pressure on the Greenback. The U.S. Dollar index dropped from the March highs of 103.96 points to 94.98 points. Technical analysis suggests that the index may drop to 2019 minimums of 94.6 points.

However, is the Greenback so hopeless that it could be assumed that it would surrender unconditionally? If the Dollar is weakening then other currencies should be strengthening, but these are the currencies of the countries mostly tailored toward exports. So, may eventually face the limits of their currencies strengthening as they struggle to keep exports on the rising track and bolster the recovery of their economies. Both governments and central banks of the EU, U.K., Japan. Canada, Switzerland, New Zealand and others at some point may oppose further straitening of national currencies.

Besides, the pandemic situation in the United States will most likely improve in the near future. The end of the pandemic may prompt a rapid recovery of the economy in North America that is sturdily withstanding the pandemic shock even at the moment, even better than the countries with strengthening currencies.

The U.S has a negative trade balance and is not addicted to the strong Dollar as its trading partners. U.S. Treasury yields remain higher than in some European or Asian countries even after their recent decline.

Continuous trade tensions between the U.S. and China and the potential second wave of the pandemic in countries that are now almost celebrating a victory over the coronavirus, should also be taken into account. These factors may boost the demand for the Greenback as the safe haven asset.

All the above factors may limit further decline of the Dollar as most of them are already priced in. Strong support levels for the U.S. Dollar index are at 94.6-95.0 points, and at these levels the Dollar may reverse its decline. Market players that are welcoming the slide of the Dollar now may honor a possible rise of the U.S. Dollar index to its resistance levels at 97.5-98 points.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.



Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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