Fundamental Drivers Keep Dollar Under Pressure
The dollar declined by about 3% last month and is heading for its worst annual performance since 2017. Hopes for fresh financial aid and developments regarding the coronavirus vaccine are expected to keep weighing on the dollar over the medium-term.
It still remains unclear for how long does the Federal Reserve intend to keep purchasing bonds to help the US economy, which could further harm the USD. Out of 72 analysts polled by Reuters, 51 said they believe the dollar will keep weakening until the mid-2021, while the rest said the currency would recover earlier.
“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 Forex strategist 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.”
The dollar may receive some support from its dominant position in the global payments system. Furthermore, currencies that gained ground against the US dollar this year aren’t likely to perform as well next year. Both the euro (EUR) and British pound (GBP) hit multi-year highs on Thursday amid widespread weakness in the greenback.
“With so much good news in the price, I think perhaps there is the possibility we will see a little bit of a retrenchment. I’m not looking for the euro to totally fade away, but I do think there is a possibility we have some sort of pullback in the euro in the next few months, said Jane Foley, chief FX strategist at Rabobank.
Currency strategists surveyed by Reuters believe that the US dollar will keep weakening to a minimum of another six months as investors continue to put faith in riskier assets.
Weaker Dollar to Support Commodity Prices
The future of the commodity markets, which have been battered after the coronavirus outbreak, may depend on the US dollar.
“The only way to get commodities moving in an inflationary, buying power way is a weaker dollar,” said Doug King, one of the most popular commodity traders and chief of RCMA’s Merchant Commodity Fund.
King added that right now many factors suggest that the USD will weaken further going ahead.
Even though this year was very challenging for the commodity markets and many other assets, it appears that commodities are turning a corner after a China-driven boom.
One of the crucial events this year when oil prices collapsed in April. At the time, West Texas Intermediate (WTI) crude oil futures closed in the red for the first time in history on the New York Mercantile Exchange.
Apart from oil, the Bloomberg Commodity Index, which monitors 23 commodity futures markets collapsed to an all-time low at that time. Since that crash, the index has recovered by 27% from that record low thanks to a sharp commodity rally, but it’s still 7% in the red year-to-date.
The commodities started gaining ground again as China, which was the first country to receive a blow from the coronavirus, started recovering from the pandemic. China, as well as the better part of Asia, did a great job curbing the spread of the virus, boosting economic activity, and stimulating a surge in demand for different commodities like corn, soybeans, and industrial metals.
The majority of commodities are priced in US dollars, and a weaker USD could fuel commodity prices further as it would make them less expensive to those who own other currencies.
A weaker dollar suggests potential growth outside the United States, rather than reflecting a weak American economy. This is one of the reasons why some analysts believe a weaker dollar is a bullish sign for commodities.
The US dollar is expected to keep declining until at least mid-2021, according to a group of analysts. In addition, a weaker US dollar could pave the way for a broader recovery in the commodity markets.