The dollar has become the boxing bag of the world and is likely to remain that way for a time.
The global reserve currency benefited greatly from a flight to security, which took it to a peak of three and a half years in March as the coronavirus pandemic spread to the US Now, as the Global Focus Has Changed For fundamentals, the dollar has plummeted to a two-year low.
Strategists say the dollar’s fall comes as the US lags behind in most of the world to stop the spread of the coronavirus, and some expect the US economic recovery to be less than others. including Europe. The dollar is also reacting to the prospect of rising US deficits and ultra-low interest rates in the future.
“The movement against the dollar is now expanding, not only more countries, like emerging market currencies, but also more participants,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “Asset managers, speculators and the other large group, judging by bias in the options markets, are hedge funds, joining the bearish dollar party.”
Since the beginning of the month, the dollar has lost 4.9% against the euro, following a bet that the economy of the European Union will outperform the economy of the United States. The dollar, in the same period, has fallen 2.5% against the yen; 6.4% against the Swedish krona and 4% against the New Zealand dollar. In emerging markets, the Brazilian real has risen more than 6% and the Mexican peso has risen 4.9% against the dollar. China’s currency, controlled by its central bank, rose just 1% against the dollar in July.
The dollar index, which measures the US currency against a basket of currencies, was down 3.77% in July, its worst monthly loss so far since April 2011, when it lost 3.85%.
“In a way, it’s a perfect storm. We have all of these things lined up,” said Jens Nordvig, CEO of Exante. “The dollar was strong for six years, and it is only now that it begins to correct itself.” He expects the euro to hit 1.20 to the dollar in the short term and then return to 1.30-1.35 to the dollar.
The massive US trillion deficit to start the year has increased by billions as the United States spends to fight the coronavirus. The dollar may respond to that in the future, as the United States issues more and more debt, and the Federal Reserve buys Treasury bonds and other assets, while keeping its benchmark federal funds rate at zero.
“We have some kind of global recovery and some countries are doing better than others. The United States is among the worst (with the virus), along with Brazil,” Nordvig said. He said the lack of virus control means more companies cannot operate normally, resulting in more potential failures and a slower economy.
“The United States’ fiscal deficits and the need to monetize that deficit is much greater than any other country in the world,” he said. The federal budget deficit was estimated at a record $ 2.7 trillion for the first nine months of fiscal year 2020, according to CBO estimates.
Nordvig said the market is also detecting inflation potential, with all the global stimulus directed at the crisis. “The price action it is taking reflects concern that the tipping point may be near,” he said.
He said the dollar movement is a bigger trend that should continue, and the momentum could feed on its own. “It is difficult to say when it could stop,” he said. “I think the G10 coins are the ones that move the most in a scenario like this.”
The pain of the dollar has been the profit of gold. The precious metal rose to a new all-time high of $ 1,941.90 per ounce on the futures market on Monday, and is up 7.2% so far in July. Gold futures for August rose 1.8% on Monday, to a closing record of $ 1,931.50 per ounce. The recovery in gold has also been fueled by stimulus from the central bank, fears of inflation and the fall of the dollar.
Gold has moved higher with stocks, with the S&P 500 up 4.2% in July. Multinationals stocks benefit from a weaker dollar because it makes the cost of American goods and services cheaper in foreign currencies.
“For me, the dollar, gold and the stock market are parts of the same story,” said Chandler. “The decline in gold, the stock market, and the dollar is correlated with lower interest rates in the United States.” The 10-year Treasury yield has been trading below 0.60%, and on Monday, the Treasury sold 5-year notes on Monday, in a record low-yield 0.288% auction.
The 10-year real return, when considering inflation, would be negative. “The United States is losing its interest rate advantage. That leg is being eliminated. Negative rates support the idea of gold and tell people that there is something to do with their money besides buying shares,” Chandler said.
Chandler said the currency market is not yet trading in the presidential election, but concerns of a Democratic victory could be negative for the dollar due to fear of higher taxes.
“This adds to the bearish sentiment of the dollar, but it is still on the margin. Add fuel to the fire, but it is not yet the fire,” Chandler said.
Nordvig said the stock market may continue to rise as the dollar falls, unless it moves very fast. If investors turned to foreign equities to a large extent, that could hurt US stocks.
“If the dollar loses more, that’s one thing, but if it’s an exodus, things go down,” he said. Nordvig said investors started moving more towards international stocks in May and continued to do so.
–– CNBC’s Gina Francolla contributed to this story.
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