The Strategist

US dollar keeps falling against main currencies

09/02/2020 - 03:39

The dollar exchange rate in the world market has updated minimum values since April 2018. The depreciation of the American currency is taking place against the backdrop of large-scale monetary stimulus in the country, the risk of keeping near-zero rates on the horizon for several years, as well as investors’ nervousness due to the upcoming US presidential elections. Not only the currencies of European countries, but also the yuan strengthened their positions against the dollar.

The American currency continues to rapidly lose its position in the world market. According to Reuters, on Tuesday, September 1, the DXY index (the dollar against the six leading currencies) fell to 91.75 points, the lowest since April 30, 2018. The fall of the American currency continues for the fourth consecutive month. During this time, the dollar index fell by 8.5%; losses exceeded 1.6% since the beginning of last week.

The depreciation of the American currency is associated with the growing volume of monetary stimulus in the United States and heightened inflationary expectations.

In addition, the losses to the US economy from the pandemic were so large that low interest rates may persist for a long time. This was announced last week in Jackson Hole, Wyoming, by Fed Chairman Jerome Powell. Now the watchdog will strive to keep inflation at an average of 2% for a long time. "Annual inflation in the US has remained below the target since March, 1% in July on an annualized basis, which, given weak demand, signals the likely persistence of near-zero rates longer than expected," analysts at ING said. The upcoming US presidential elections add to the nervousness of investors.

In such conditions, investors willingly go to the currencies of other countries, primarily European ones. Since mid-May, the pound sterling and the euro have risen by almost 11%, according to Bloomberg. Since the beginning of last week, they have added 2-3.2%. This is facilitated by the rapid recovery of the region's economies after the collapse in the second quarter. In particular, according to Reuters, the German government has improved its macroeconomic forecast for the current year and expects GDP to contract by 5.8% instead of the expected decline of 6.3%.

The currencies of developing countries are also strengthening. In particular, since the beginning of summer, the US exchange rate has fallen by almost 5% against the yuan, and over the past seven days by 1.4%, reaching CNY6.81, the lowest since May 10, 2019.