Has the dollar lost its grip on the iron throne?
What is next for the dollar?
If one could describe the Dollar's performance over the past few months in one word, the best fit would be vulnerable.
The once king of the FX space has weakened considerably in Q3, depreciating against every single G10, most Asian and emerging market currencies. This is despite its safe-haven status and the global reserve currency title. For those who are wondering why the Greenback remains depressed and unable to shake away the blues despite the general uncertainty, the first clues can be found in the US economy.
There have been over six million confirmed cases of COVID-19 in the world's largest economy which continues to foster a sense of unease over the country's economic prospects for 2020 and beyond. In Q2, GDP contracted by an alarming annual rate of 31.7 percent while more than 57 million American have sought unemployment aid since March. To rub salt into the wound, economic data remains shaky with the latest US retail sales for July printing below expectations with growth of 1.2% compared to the 8.4% witnessed in the previous month.
Trillions of dollars pumped into the markets by the Federal Reserve to boost liquidity has attributed to the bearish sentiment. Over the past few months, the U.S central bank may have printed $3 trillion in cash to support asset markets and equities against the coronavirus menace. While the Federal Reserves unlimited quantitative easing (QE) has provided a critical lifeline to financial markets, an oversupply of the currency in circulation continues to weigh on the Greenback.
As the presidential elections loom in November, another element of uncertainty is added to the complicated Dollar equation. Back in July, the President of the United States Donald Trump floated the idea of delaying the elections until the polls are ready to open without the threat of a pandemic. While a delay is unlikely, this certainly adds to the growing noise of political developments haunting investor appetite towards the Greenback. To add to this, the coronavirus stimulus stalemate continues to drag on, exposing the US economy to downside risks.
When combining the list of negative themes weighing on the US economy, the outlook for the Dollar in the short to medium term certainly looks gloomy. However, there a couple of factors that could protect its status as the global reserve currency in the longer term. Other than the mighty Greenback, what other currency in the world can fill its shoes when it comes to transparency and credibility of US monetary policy? Most global transactions are denominated in Dollars which serves as a broad unit of account, something that is unlikely to change anytime soon.
our attention back towards technicals, the Dollar Index (an index of the value
of the United States dollar relative to a basket of foreign currencies) has
dropped almost 5% since the start of Q3 with prices trading around 92.60 as of
writing. If Dollar weakness remains a recurrent theme, prices could extend
losses to levels to not seen since March 2018 around 90.00.
This article was written by Lukman Otunuga, Senior Research Analyst at FXTM.
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