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The US dollar went from lifeline to wreck in a topsy-turvy 2020 that many investors say marks the start of a downtrend for the currency.
The ICE US Dollar DXY index,
a unity measure against a basket of six big rivals, was down 6.7% for the year, according to FactSet, its first annual decline since a 9.9% drop in 2017. What’s more, the Index hit a low of 89.52 on Thursday, its lowest since April 2018. A drop below 88.25 would wipe out the 2018 low.
The index drop came after the financial panic created by the COVID-19 pandemic in February and March sparked a dollar rush that propelled DXY to a more than three-year high. The Fed’s action, pumping liquidity into financial markets and expanding or establishing swap lines with foreign central banks, has been credited with helping the dollar turn south.
“A little less than three months after the start of 2020, the dollar was the main strongest currency in the world, although it was slightly weaker against the Hong Kong dollar,” recalled Kit Juckes, macro strategist. worldwide at Société Générale, in a note. “Since the Fed’s policy steal at the end of March, however, it has been weaker against almost everything,” with the notable exception of the Turkish lira USDTRY,
and Brazilian real USDBRL,
The weakness of the dollar has been widely welcomed by investors, who see it easing global financial conditions. A weaker dollar is seen as a clear advantage for US and global equities, including emerging markets.
Lily: Here’s what the falling US dollar means for the stock market
A weaker dollar is also seen as an advantage for commodities, which, like stocks, rebounded sharply from losses caused by the pandemic in the spring.
See: How a weaker dollar could help fuel a commodities boom in 2021
The DXY is heavily weighted towards the euro EURUSD,
which fell 0.7% Thursday to $ 1.2216 but was up 8.9% for the year and hit a 33-month high against the dollar. The European Central Bank is among the parties that are not happy with a weaker dollar, as a stronger euro weighs on import prices and makes it harder to meet the bank’s elusive goal of inflation close but just below 2%.
It would take a move in the euro above $ 1.25 to push the DXY through support at 88.00, Brad Bechtel, global head of foreign exchange at Jefferies, said in a note.
This seems “destined to happen” in early 2021, he said, with the ECB continuing to face deflationary pressure from a stronger currency and “persistent viral overhang”.
He doesn’t see the DXY dropping much below 88, or the Euro dropping well beyond $ 1.25, “but we’ll know more about that as we move forward in Q1 2021. “
Juckes noted that the dollar selloff stopped over the summer, but all major trends trace back to the end of the first quarter after the Fed acted.
“Maybe the big trend is the one already underway, as vaccines are doing their job. On that basis, we are riding a wave of optimism for vaccines, subscribed by cutting the money, in the first half of next year, ”he wrote.
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