Daily Outlook

The dollar will hit those who started burying it

As the dollar was declining in previous weeks, there were more and more apocalyptic forecasts about its prospects. For the most part, such forecasts are based on the mention of huge government debt, as well as high budget and payment deficits.

However, it is important to understand that the story about the dollar’s loss of its exorbitant privilege has been periodically appearing in the markets for more than a decade and is amplified after a two or three weeks of its weakening. This is just as long as we are witnessing the trend of dollar growth against its main competitors.

It is difficult to refute globally the fact that the U.S. economy is overburdened with debt and the budget deficit has swelled to levels unseen in peacetime. It is difficult to argue with the fact that this refrains the economy from rapid growth. However, betting against the dollar can prove to be very expensive during the global economic crisis.

Locally, the U.S. currency is supported by the fact that investors rushed in the direction of the dollar due to fears of a second wave of the virus spreading around the world. A lot of money to the financial markets comes from the U.S., and in case of increased uncertainty, investors return it in order to survive the period of uncertainty.

Apart from sentiment, capital is also rushing to the United States due to the fact that the U.S. Treasury continues to talk about new support programs. The amount of the new, fourth stimulus plan already reaches $2 trillion. Right now there is little doubt that the U.S. will be able to attract this money in the coming months, which will push up the demand for the dollar.

In addition, these purchases of dollar debt assets promise to quickly turn into a sale of stocks and currencies on emerging markets. They have grown impressively in previous months, so it will be easy for many investors, including major institutional players, to sell stocks that are close to historical highs during the economic disaster.

To a large extent, in recent weeks the stock market has been pushed up by retail buyers. Many have invested and earned on the rebound. This dynamic was also supported by institutional investors. But now there are more and more signs that retail investors are buying but institutional investors are selling. In this regard, one should not be surprised what a painful retaliatory blow the dollar may hit in the coming weeks.

The destructive effect of the Fed’s printing press on the value of the dollar is a long-term theme, which is safer to return to when the whole world will back on the safe track of synchronous recovery. While the U.S. Treasury announces its intention to wipe out market liquidity, the dollar is able to continue growing.

As a rule, before the reversal of the dollar to decline, a powerful wave of its growth can pass first, which will relieve the markets from pessimists. Technically, the dollar index came out of the oversold area at the end of last week. It is a signal for a rebound with a short-term target of 1% above current levels. Meanwhile, EURUSD may decline to 1.1000. However, in our opinion, the return above 100 points on the index (+2.7%) may be a very achievable target for the American currency in the coming days. It will be necessary to monitor the situation near these levels, and in our opinion, the dollar has many chances to continue its growth above these levels and to renew 17-year highs near 104.

The FxPro Analyst Team

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