With the global economy “recovering,†the U.S. dollar encounter more downward pressure as investors opt for riskier assets and the Federal Reserve keeps rates near zero. The U.S. dollar’s widely expected decline was put on pause at the start of 2020 as many embraced the greenback for its “safe haven†qualities. In March, the U.S. dollar index (DXY) peaked above the 102 mark. However, the DXY has been declining since then and most recently trading near 2.5-year low, which is below the 90 mark. Many analysts aren’t ruling out some more U.S. dollar strength q1 of this year, but many are confident that the overall trend for 2021 will be down.
The COVID-19 pandemic has only paused the U.S. dollar’s inevitable decline, stated by Bannockburn Global Forex chief market strategist Marc Chandler. Bannockburn also pointed out that “The dollar was sought not only as a safe haven, but the unwinding of structured trades that used the dollar to fund the purchase of higher-yielding or more volatile assets (think emerging markets, for example) also lifted the dollar broadly.†Now that the emergency demand for the dollar has subsided, the greenback’s downtrend can resume, he noted, noting that the U.S. dollar’s third significant rally since the end of Bretton Woods is over. “While we may have been early on the dollar bear call, it has become the consensus view … It seems the bearish outlook can be framed as a return of the twin-deficits. A large current account and budget deficit don’t always translate into a depreciating dollar, but this time it likely will.
The U.S. isn’t expected to offer the interest rate or growth differentials that attract the world’s savings at current prices,” Chandler explained. The key factors behind the dollar’s bear market are massive money printing, inflation, economic recovery, risk-on sentiment, and loose monetary policies. Dollar will weaken given the huge amount of debt and money printing in the U.S.,” said Goehring and Rozencwajg Associates managing partner Leigh Goehring. It is quite clear that many market analysts are seeing the same story for the dollar. So, if this is most likely the case for the dollar we must position ourselves accordingly so we can reap the rewards of a crashing dollar rather than getting wipe out due to the currencies decline value. Many arguments are made that the increase in asset valuations is due to the declining dollar, this argument holds merit since it appears almost all asset classes are up on the dollar. If this is the case and the dollar is poised for more downside action than positioning ourselves in assets that will experience the most increase in dollar terms would be the smartest move as an investor.