FUNDAMENTAL STRATEGY
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EDUCATION FROM BROKERS
Tue 23 Feb
Where is the US dollar heading?
What is the dollar outlook at the moment?
The US
dollar made a good start in 2021 after a sharp fall in 2020, but January's
bounce, driven by profit-taking and optimism of faster economic recovery, was
short-lived.
The Dollar Index which measures the
performance of the dollar against six major currencies - was in a steep
downtrend during most of 2020, falling around 7% during the year and hitting
the lowest in nearly three years.
The greenback spiked during the March
crisis as investors rushed into the traditional safe-haven asset due to high
uncertainty, but massive Central Bank support and prospects of coronavirus
vaccine reversed the trend and sent the dollar sharply lower.
In comparison to the 2007/2009 recession
when the dollar made wild gyrations, the action in 2020 was milder, due to the global
crisis caused by the pandemic and similar policies of Central Banks and
governments that include massive fiscal supports and ultra-low interest rates.
The main factors that influence US dollar performance
Interest rates
The US Federal Reserve is expected to keep
interest rates at record lows and continue asset purchases as the Central Bank made
a shift in its policy in 2020, signaling that the interest rates will start to
rise only when inflation makes a significant move and rises to a 2% target zone
and until labor market conditions return to levels consistent with the Fed's
assessment of maximum employment.
According to the Central Bank's forward
guidance, the downward pressure on longer-term rates is expected to persist and
ultra-loose policy to stay in place until at least early 2023 that keeps grim
outlook for the dollar.
Economic activity
The US economy contracted by 3.5% in 2020,
due to the severe impact of the coronavirus pandemic. The gross domestic
product slumped 33.3% in the second quarter, when the outbreak hit the United
States, but rebounded 33.4% in the third quarter, as optimism about economic
recovery rose.
The new COVID-19 wave and subsequent
tough restrictive measures slowed the recovery greatly, resulting in a 4%
contraction in the fourth quarter of 2020.
The activity in the US manufacturing sector
has slowed sharply in mid-2020, falling to the lowest levels in more than a
decade, but managed to recover in the second half of the year, peaking at a six-year
high in December.
Improving conditions in the manufacturing sector counter more negative figures
from the services sector, which was strongly impacted by a new set of measures
on the second wave of coronavirus.
Labor
The US employment was seriously affected by
the unprecedented impact of Covid-19 pandemic on the US labor sector, with the
magnitude of job loss in March and April 2020, not seen since the end of World War II.
The employment in the US slumped by 14.5%
in 2020, compared to a 6.3% drop during the 2007/2009 Great Recession, whilst unemployment spiked at 14.7% last year,
against 10% rise during the previous crisis period.
The US labor sector has lost 20.6 million
jobs during the March lockdown, when the crisis peaked, with a subsequent quick
rebound in May and June, but a renewed weakness was seen in the July-December
period, when the US non-farm payrolls were in a steady descent and hit the
first negative result of -227K in December.
The mild and below expectations recovery in January suggested that a rise in
employment regained traction, but the pace of recovery remains slow, signaling a
prolonged period of recovery that had a negative impact on the dollar and
resulted in a recovery stall.
The jobless claims have significantly
dropped from their 6.8 million peak in March, but the number of Americans
filling for government unemployment benefits remains stubbornly high and above
the highest of the 2007/2009 Great Recession.
Persisting weakness in the US labor sector
signals that recovery process is going to be longer than initially anticipated
and is going to move at a much lower-than-expected pace.
Fiscal stimulus
The US government has already pumped around
$3 trillion into the economy at the beginning of crisis, with $900 billion
being added in December.
The aid from the first package has already
drained and a long discussion about the new package, worth $1.9 trillion, much
needed to keep the economy afloat, is underway in the US Congress.
The US lawmakers are so far unable to reach
an agreement on a size of the package, despite strong warnings that the US
faces a dangerous wave of bankruptcies and unemployment if it does not maintain
fiscal support until the coronavirus-driven crisis ends.
The 2021 outlook
The outlook for the US dollar for 2021
remains weak, with the dollar expected to remain under increased pressure
during the first half of the year, on anticipation that economic recovery is
not going to gain pace during this period.
Although the coronavirus vaccine has been
rolled out and immunization started in the US, it is expected to take time
until it starts giving significant results in stopping the raging pandemic and in
bringing the life and economic activity back to pre-pandemic levels.
Strong risk appetite in the market, driven
by hopes of new fiscal aid package that would boost economic recovery,
continues to lift US stock indices
and pressure the dollar, with the S&P500, Dow Jones and Nasdaq100 hitting
new record highs and signaling further advance.
High oil prices also weigh on the US
dollar. The crude oil made significant recovery after a historic fall during
the March-April 2020 period, when oil prices hit zero level at one point.
Improved sentiment on rising expectations that recovery in global oil demand
will speed up and return to normality after being slashed during the crisis,
continues to lift oil prices and boost the risk sentiment.
The
dollar index
is pressuring key technical supports at $90/$88 zone, with
stronger bearish acceleration expected on breach of these levels.
The weakness is expected to persist in the coming months, with some relief for
the greenback to be expected in the second half of the year if economic
recovery picks up, although most of market observers do not expect a significant
rise of the greenback this year.
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This article was
submitted by Windsor Brokers.
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