Market Overview

30 December 2020

The Weakening of the Dollar May End Soon

The restless year of 2020 seems to be ending with optimism as compensation for all the disturbances that investors experienced during this year. The last week of the year is concentrated on all the latest positive news, which is the type of news that did not surface over the stretch of the other 51 weeks of 2020. The new relief bill saga in the United States, which lasted for several months, finally ended with the approval of Congress and the bill being signed into law by the President Donald Trump. Moreover, President-elect Joe Biden promised more stimulus measures on top of the approved $900 billion package after his inauguration. The House of Representatives has approved the increase of direct payments to Americans from $600 to $2000 and the Senate may vote for this increase by the end of 2020. The EU has finally reached a long-awaited post-Brexit trade agreement with the United Kingdom. Mass vaccination seems to be bringing hope for increased business activity and trade in the coming year.

Markets seem to be taking notice of all this positive news as prices for risky assets have been rising. The S&P 500 broad market index posted a new all-time high on Tuesday reaching 3750 points.

However, it’s a very uneasy time for the U.S. Dollar that turned quite weak amid the demand for risky assets. New stimulus measures in the United States would probably mean that new Dollars will be printed. A possible inflation hike in the U.S. is no longer a concern for the Federal Reserve (Fed) since the monetary policymakers are not rigidly targeting inflation at 2%, and a tighter monetary policy will probably not be put in place when this target is achieved. So, interest rates and loose monetary policy are expected to be maintained for a long time. If this is so, yields on Dollar-denominated instruments could remain low and that may lower the attractiveness of the U.S. debt.

But amid this negative background for the Greenback, the U.S. Dollar index is holding firmly at 90 points, or 2018 lows. While stock market indices are posting new all-time highs one after another, the Dollar seems to be reluctant to all the negative factors that seem to be against the American currency. The index is holding above the lows at 89.6 points despite more negative factors that appeared after these lows were reached.

That may mean that the weakening of the Greenback happened more because of expectations and is already priced in. The U.S. Dollar index has fallen from 104 points or 14% since March 2020 and its further depreciation may be limited as there are no additional driver for the Greenback to slide further. The predicted global economic recovery in 2021 is most likely to be directed by the recovery in the United States. This may be a key driver for the recovery of the Dollar. Moreover, the expected increase of GDP in Europe and Asian countries could be achieved through exports of products and commodities. So, these countries could need weaker local currencies against the Greenback to boost exports.

Further scenarios may become realities in 2021. The decline of the U.S. Dollar index may halt at the strong resistance level of 88-88.5 points. This is where it was terminated in 2018, and since then the index rebounded to 104 points by March 2020. As Mark Twain said: “History doesn’t repeat itself, but it does rhyme.”


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.


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