Short-Term Choppiness Expected
The most recent developments regarding a new stimulus package have increased sentiment in global markets and elevated demand for riskier assets, hurting the dollar, which is considered a safe-haven asset.
Yesterday, President Donald Trump said Democrats are being disinclined to come to a reasonable compromise, relieving some pressure on the dollar. The dollar index traded slightly lower at $92.61 against a group of currencies in the early session but managed to stay above its recent short-term bottom.
The euro moved down 0.16% to $1.18420, dropping from one-month highs of $1.18805 reached on October 21.
Ester Reichelt, the Forex analyst at Commerzbank, said the euro gained some rest after it rallied against the USD.
“The US Presidential elections are only 12 days away, before that nobody wants to commit too much to a particular direction in euro/dollar,” Reichelt said.
“In particular as hopes of a fiscal package in the US ahead of the elections are crumbling once again, as it is not just an agreement between Democrats and the White House that is needed.”
Pelosi and Mnuchin Struggle to Make Progress
The Speaker of the United States House of Representatives Nancy Pelosi and Treasury Secretary Steven Mnuchin held talks again on Wednesday to narrow down differences over the new stimulus package ahead of the upcoming election.
Drew Hammill, Pelosi’s spokesman, said talks between Mnuchin and Pelosi were productive and both are now “better prepared to reach compromise on several priorities.” The two are expected to talk again today.
“Differences continue to be narrowed on health priorities, including language providing a national strategic testing and contract tracing plan, but more work needs to be done to ensure that schools are the safest places in America for children to learn,” Hammill added.
Before Wednesday's talks, Pelosi said that there’s a chance for an agreement. She also said that she feels optimistic about the deal but pointed out that Democrats and Republicans may not come to terms before the election.
“I’m optimistic that there will be a bill,” Pelosi said. “It’s a question of, is it in time to pay the November rent, which is my goal, or is it going to be shortly thereafter and retroactive?”
Mitch McConnell, Senate Majority Leader, advised the White House against striking an extensive deal before Election Day as legislation that is likely to cost nearly $2 trillion or more would split his caucus ahead of the election.
Republican senators are also concerned about coming back home to the campaign following the anticipated vote to confirm Supreme Court nominee Amy Coney Barrett on Monday.
In case Mnuchin and Pelosi come to terms, they will have to seek support from Senate Republicans. White House Chief of Staff Mark Meadows said it’s still unclear how many Republican votes the deal is likely to get until the negotiators have actually come to terms.
The Dollar Vulnerable to ‘Substantial Devaluation’
Eric Robertsen, global head of research at Standard Chartered Bank, said that the dollar is prone to substantial devaluation as sovereign fundamentals are “pointing south.”
“You have the twin deficits in the US getting worse, you have the trade balance at the worst in 15 years,” Robertsen said.
He added that the outcome of the upcoming election would reveal the path that leads to the ultimate result. A Biden win could potentially lead to the dollar devaluation trend in the next few years.
Robertsen continued that if Biden wins the election, any USD devaluation would become very apparent and pronounced. In contrast, if Donald Trump wins again, it will be “a little bit more messy in the short term.”
Robertson said the incredible performance of American assets has fueled the dollar’s appreciation in the past 10 years, with the S&P 500 outshining the MSCI Emerging Markets equity index by 100 percentage points during this period.
“If you were to see a reversal of that — either because of global trade or a change in the United States’ domestic economic agenda — and combined with the fact that the U.S. no longer has an interest rate advantage over its G-10 peers, I think you can make a very compelling case for a multi-year dollar depreciation,” he said.
Another notable economist Stephen Roach said that given the conditions, the dollar is set for a sharp drop in the following year and projected a 35% decline of the dollar by the end of 2021.
The dollar stayed above its 7-week lows as it remains unclear whether a new fiscal package will be passed before Election Day. A Joe Biden win could potentially push the dollar into a multi-year long bearish trend.
About the Author
Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.