Last week, Donald Trump suddenly supported the dominance of the US dollar, in contrast to his previous stand on the currency's position.
According to experts, the head of the White House now has good reasons to support a strong dollar policy.
"Since the onset of the coronavirus crisis, the world's leading central banks, including the Fed, have cut interest rates to almost zero, and national governments have launched unprecedented spending programs. The focus has shifted from trade and competitiveness to financing bloated budget deficits," said Seema Shah, strategist at Principal Global Investors.
"It is very important that investors do not lose faith in the US financial system and its ability to repay debt. Thus, it is in Trump's interests to finally adopt a strong dollar policy," Shah said.
Another factor of the change in Trump's stance is the upcoming presidential election, since due to the pandemic, unemployment in the country has risen sharply, and forecasts for the national economy have worsened.
"A strong dollar is another way to demonstrate US exclusivity, which is part of the campaign slogan. The stronger the dollar, the stronger the US seems," said Mark McCormick of TD Securities.
In addition, amid the crisis generated by the COVID-19 pandemic, interest in the US dollar as a safe haven has sharply increased, so trying to counter it is like swimming against the tide.
The current driver of the USD index growth is the continuing tension between the United States and China, which the White House seems to strongly support. Washington's tougher licensing requirements for companies trading with Chinese tech giant Huawei also added fuel to the fire. It is possible that with the slogan "Let's make America great again, and China will obey us," Trump plans to go to the polls to win them.
If earlier, the main currency pair moved in the side channel 1.0750–1.1000, the range of its fluctuations now has decreased to 1.0770–1.0900. EUR / USD is gradually consolidating in the region of 1.0800 - an area that has remained very stable from the very beginning of the coronavirus crisis. The pair must confidently move away from the level to show directional movement.
Rabobank experts forecast the EUR / USD pair to exit the current consolidation phase by making a "bearish" breakdown of the lower limit of the range.
They believe that the main factor of pressure on the euro is the continuing disagreement between the EU member states in the face of the difficult economic consequences of the COVID-19 pandemic. The dollar, meanwhile, will receive support as a traditional safe currency.
"Whatever is the outcome of the disagreement between the German Court and the ECB, we expect the EUR / USD pair to decline to 1.05 in a span of three months," Rabobank said.
Meanwhile, analysts at Danske Bank said that the euro may fall to parity with the US dollar, or rise above $ 1.20 depending on whether the eurozone leaders resolve their differences and whether the global economy recovers from the blow caused by the pandemic.
"In the long term, the EUR / USD rate will reflect the balance between the negatives for the dollar (global and, in particular, the reflection in the US) and the negatives for the euro (risks of the eurozone collapse). If any of these risks begins to materialize, EUR / USD can move in any direction, falling to parity or exceeding 1.20," they said.
