Is Dollar dropping positive for markets?

The American currency declined this month across a wide range of markets, and this is good news. The dollar index is almost 5% below its peak on March 20. However, this retreat of the American currency should not be associated with a high number of cases of coronavirus disease.

Neither it is a reflection of the world’s largest economy weakness. In general, it has a high chance for growth due to the ability of the U.S. Treasury to borrow money at near-zero interest rates.

The current wave of dollar weakening is a sign of the beginning of the world’s recovery. For sure, it is too early to give a final verdict. However, the markets are seeing cautious purchases of assets that have fallen in price but are still relatively healthy.

There is a fundamental difference between market growth in mid-March and now. At that time, it was a bounce after the markets collapsed. Later, in late March and early April, the markets were balancing, waiting for further signals. There have been more positives:

– The world as a whole has managed to stabilise the spread rate: it has been declining for several consecutive days, as well as the number of new deaths; – governments and central banks of developed countries have announced unprecedented injections into national economies; – some countries in Europe are already beginning to lift the restrictions gradually.

The Fed fulfilled the market’s demand for dollars in the form of extreme asset purchases. Now the question is different. Where will these “printed” trillions of dollars and billions in cash checks distributed to millions of people go?

The experience of 2008 suggests that at the first stage, this money comes to financial markets. It affects the prices for commodities.

Whether this will accelerate the overall inflation rate is an important question. This did not happen after 2008, as consumers put new income to reduce the debt burden and increased savings.

Now it is more likely that the new money will accelerate inflation, which will further erode the value of the dollar. Besides, the dollar will be “spent” from world reserves.

And this can be considered as good news because periods of moderate weakening of the dollar are often associated with the accelerated growth of the world economy, increased demand for oil and metals and recovery of high yielding currencies, which collapsed in the first three months of this year.

The FxPro Analyst Team