The weakening of the US dollar is set to slide even further, but its importance as the world’s reserve currency is unlikely to diminish, according to analysts.
The greenback had benefited when investors flew to safety amid the pandemic, which carried it to a half-and-a-half-year high in March.
But now strategists say the country’s economic recovery is in question, given the weak response from coronavirus. The dollar had also responded to the country’s growing deficit and the prospect of US interest rates remaining lower for longer.
The dollar index fell last week to a 27-month low at 92,477, a steep decline from its 102 level in March. Since then, it has fluctuated, fluctuating between 92 and 93 levels in the past week. It was last Monday at 93,150.
“Economic performance of the US relative to the euro area and Japan (no longer) seems guaranteed, at least in the next few years, given the faltering virus response. Furthermore, the new recovery fund gives EUR 750 billion of European Union investors more confidence in the euro as an alternative, “said Patrik Schowitz of JPMorgan Asset Management in a recent note.
The global multipurpose strategist added: “Reducing its interest rate advantage makes the USD less attractive and drives investors to consider deposits in other currencies. These cyclical factors are not reversing rapidly and the US dollar is likely to fall further.”
BlackRock Investment Institute also said that dollar will remain weak in the full term as the factors leading to the recent depreciation of the currency will continue to play a role.
“The prospect of the dollar retaining its perceived safe haven status is another concern. We are considering this as a controversial US presidential election weave,” BlackRock strategists wrote.
The death of the dollar ‘greatly exaggerated’
However, analysts claim that recent fears that the dollar may lose its status if the world’s reserve currency is too much.
Jonas Goltermann, senior economist at research firm Capital Economics, says talk of the dollar’s downfall is “greatly exaggerated.”
He said dollar bears have pointed to the growing share of the greenback in recent years. According to data from the International Monetary Fund, the dollar share of total global reserves fell from 64.7% in the first quarter of 2017 to around 62% in the first quarter of 2020. In the last quarter of 2019, it saw a low of 60 , 9%.
However, Goltermann said the decline in the dollar index since March could be attributed to reasons other than the currency’s reserve status, including low interest rates and Europe’s steps to boost the continent’s economy. The latter has triggered a “remarkable” shift to the euro.
Since June, the dollar has lost around 6.6% against the euro.
In fact, Goltermann claims that the crisis of the coronavirus has ‘strengthened’ the role of the dollar as the major global currency. He noted that the greenback increased when the demand for safe haven jumped in March as the pandemic swelled in the US, Europe and elsewhere.
“Perhaps more importantly, there is no obvious alternative to the dollar,” Goltermann added. “The next two largest economies, the eurozone and China, are both smaller than the US, and the euro (because of its still fragile political underpinnings) and the renminbi (because of China’s capital controls and unique political system) have significant deficits. as reserve courses. “
Sven Schubert, senior investment strategist at Europe-based Vontobel Asset Management, also pointed to the yuan and the euro as the two most viable alternatives in the coming decades. But both are not yet “serious competitors,” he said. Schubert added that about 50% of global trade contracts are still quoted in US dollars, despite the country having only about 12% of world trade.
“The depth of the US financial markets is unusual, central banks prefer to still hold a majority of their reserves in USD, the major commodities in the world are traded in USD and most global trading contracts are quoted in USD and EUR, “said Schubert.
.
