Case for a weak US Dollar

2020년 7월 31일

Four factors that typically influence the dollar’s direction have shifted from bullish to bearish since the onset of the coronavirus crisis:

1) FOMC has shifted to a zero-rate policy

• US interest rates (adjusted for inflation) are negative
• Growth expectations have slowed while inflation expectations have risen… sending Real Interest Rates down
• Fed sharply increased access to U.S. dollars through its swap facilities with other central banks, increasing the supply of dollars in the global economy and enabling greater access to dollars to a wide set of economies at lower cost.

2) US Growth likely will underperform other major economies due to COVID

a. The slow U.S. response to the coronavirus crisis has altered expectations about economic growth relative to major country peers. Outbreaks in Europe and China appear to have peaked, while in the U.S. cases are still rising. Consequently, the U.S. economic recovery is likely to take longer, with higher unemployment and weaker consumer spending.
b. The European Union’s recovery fund marks a step toward greater mutualization of debt (combination of debt across Europe Union)—a factor that can reduce the perception of risk around the euro currency.
c. Recent purchasing managers index (PMI) data suggest that the U.S. economic rebound is leveling off while growth is rising in most other regions.

3) Political uncertainty has risen

a. Rising tensions between the U.S. and China
b. Upcoming presidential election, make the outlook for the U.S. less certain. With less clarity about the direction of policy or its implications for the economy and regulations, foreign investors may begin to shy away from U.S. investments.
c. While the US dollar is still a safe-haven currency in times of global turmoil, in the absence of a crisis, the outlook for other countries looks more predictable.

4) Increasing US budget deficit will need to be financed with foreign capital

a. Historically, a rising budget deficit has often been a leading indicator of dollar weakness.
b. Because the U.S. is a net debtor nation, a rising budget deficit needs to be financed with foreign investment.