The DXY is likely to fall 6% in 2020, the first drop in 3 years. While the US economic recovery should support the dollar, exceptionally flexible monetary policy, widening deficits (exacerbated by a new round of fiscal stimulus), and weakening demand for safe-haven assets should keep the US dollar weak in the coming year.
The recent streak of US dollar wins ended overnight when the dollar index fell 0.27% to 90.41. The positive risk tone in Asia today drove the index further down 0.27% to 90.16. For the most part, the fall overnight and this morning may be due to the rise in the pound sterling amid Brexit events.
Overall, however, the US dollar is weakening against its major currencies, with the Australian dollar and euro up 0.25%, while the pound was up 0.53% to hit 1.3555.
Before Christmas, the US Congress closed a $900 billion financial deal. Despite Trump’s threat to veto the bill without raising, among other changes, the $600 “ridiculously low” stimulus checks to $2,000, we believe the new stimulus round will eventually be approved. This bill, along with an earlier US$ 2.2 trillion bill, should significantly increase the US budget and current account deficits. This is likely to put pressure on the dollar in the long term.
Vaccine news in the 4th quarter of 2020 boosted market optimism and put pressure on safe-haven assets, including the US dollar. Given the baseline scenario that the worst is over and green sprouts are emerging in the global economy, demand for the dollar as a safe-haven should decline further next year.
The recent discovery of more transmissible variants of the virus could jeopardize the above point of view. However, it is not yet known whether the effect will be reduced. Following the ebb and flow of 2020, the Fed’s commitment to monetary easing, growing deficits as a result of fiscal stimulus, and reduced demand for safe havens will further weaken the US dollar next year.
The main risks to our outlook include a faster-than-expected Fed monetary tightening, a slower-than-expected economic recovery/another dip into the global recession due to the resumption of the pandemic.
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