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4 Dec, 2020 11:27

US Dollar slide expected to continue into next year on risky bets & stimulus speculation

US Dollar slide expected to continue into next year on risky bets & stimulus speculation

The US currency’s downward trend is likely to last at least another six months as investors continue to shift to risky assets and higher returns, a Reuters poll of currency strategists found.

The results match findings from a November global stocks poll in which a majority of analysts said the current equity bull run would continue for six months or more.

“You can’t have such an over-valued dollar, it’s as simple as that. The dollar had become and still is significantly over-valued on pretty much any measure that I can think of as a result of monetary policy divergence, and convergence takes away all reasons for that,” said Kit Juckes, head of FX strategy at Societe Generale.

“The market reacting to that monetary policy adjustment is accelerating because that seems to bring reasons to look for better investment opportunities abroad,” he added.

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The greenback has dropped about 13 percent since peaking in March. It is down almost six percent this year, and is on its way for the worst yearly performance since 2017. The US Dollar Index has fallen over ten percent against a basket of currencies since March 18.

Analysts say Congress’ renewed focus on fiscal stimulus could hurt the greenback further.

Last month, Citibank warned that the widespread distribution of vaccines to combat the coronavirus pandemic and ongoing monetary easing could lead to the US dollar weakening as much as 20 percent next year.

Citi has attributed the potential crash to bets that the US central bank will continue to use all its tools to support the US economy next year. The Federal Reserve said it will keep rates low even if inflation expectations rise, which could potentially lead to the US yield curve steepening as well.

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