Leading central banks declared war on the coronavirus, and analysts were divided on the future dynamics of the dollar.
The Federal Reserve unexpectedly lowered the interest rate by 0.5% last Tuesday. Several central banks followed its example, and now the market is waiting for similar actions from other regulators.
CIBC and Deutsche Bank forecast further depreciation of the US currency due to a reduction in the differential of returns between the United States and other countries. Goldman Sachs and JPMorgan, by contrast, are waiting for the greenback to strengthen amid increased demand for reliable assets.
At the beginning of the year, experts from a number of banks predicted a drop in the USD rate, which instead rose in January – February. However, then the expectation that the Fed would lower borrowing costs to combat the deterioration of financial conditions due to the coronavirus outweighed the attractiveness of the dollar carry and the US currency fell in price. Fed Chief Jerome Powell promises to take additional measures to support the national economy, if necessary.
"The decrease in US rates by 0.5% immediately strengthened our bearish views on the dollar. The greenback's reputation as a highly profitable defensive currency has been seriously affected. In the near future, we expect a further depreciation of the dollar against the euro and the yen," said CIBC strategists.
Deutsche Bank experts recommend investors to stay in short positions in the US dollar against the euro, the yen and the Swiss franc. They believe that a reduction in the differential of returns between the United States and other countries will provoke foreign investors to sell the US currency.
Meanwhile, JPMorgan believes that the potential for USD depreciation is limited.
"History suggests that simultaneous easing of monetary policy around the world usually provides support for the US currency. There have been four such episodes in the recent past, including October 2008 and November 2011. On November 30, 2011, the Fed lowered the interest rate, and the USD index rose by 1.7% the following month," the bank's analysts said.
They advise investors to stay in long positions on defensive currencies, including the US dollar, waiting for further deterioration in the global economy.
The same view is shared by strategists at Goldman Sachs.
"If the market remains volatile, as we predict, it will be difficult for risky currencies to compete with the US one. The yield differential between the dollar, euro and yen will continue to shrink, as the Fed has the ability to cut rates, while the ECB and the Bank of Japan have almost none. At the same time, central banks in some developed and most developing countries can and will do this, which will support greenback," they said.
