Wednesday's sell-off was taken by surprise, as it was not caused by fundamental drivers. Analysts explain this by psychological factors. The situation is unique, which makes forecasting difficult now. Volatility in the markets may continue, but a prolonged downward correction is unlikely to continue. There is an appetite for risk. U.S. futures returned most of Wednesday's losses early in the U.S. session.
In fact, there were no fundamental changes in the greenback. The US dollar index is still moving around the 90-point mark, and it moved into negative territory in the evening. The dollar has no reason to grow yet. The Federal Reserve leaves the course for an ultra-soft policy, and the markets continue to wait for large-scale incentives for the US economy.
The EUR/USD pair returned to growth after the European Central Bank tried to interrupt the upward dynamics of the euro with verbal interventions. According to analysts, the ECB will not be able to influence the euro. Measures aimed at preventing further appreciation are unlikely to do much damage to the euro.
"The ECB's comments may delay, but not stop, the strengthening of the EUR/USD pair this year, as the dollar will remain weak throughout the year," ING wrote.
Recall, on Wednesday, a senior ECB official said that if necessary, it is possible to reduce the deposit rate to prevent the strengthening of the euro, which undermines inflation.
The rise in the euro is partly fueling the declining dollar. Investors are once again interested in risk. Wall Street is rising at the expense of the technology sector, which broke the fall. The optimism is supported by statistics from the labor market. The number of applications for unemployment benefits in the United States fell significantly over the week.
However, the impact of this factor may not be long-term, since the markets are based on what the economy will look like in six months. The current picture is not so pleasant. US GDP shrank at the fastest rate since World War II. According to the first estimate released on Thursday, economic growth fell by 3.5% in 2020.
Concerns about the slowing pace of the US economic recovery due to the coronavirus pandemic, rising stock market prices and uneven distribution of vaccines are making investors nervous. This is becoming noticeable. In the near term, a pullback or an increase in volatility is possible.
Few people believe in the dollar's growth
Forecasts for a further decline in the dollar are published often. Among the pessimistic representatives of Morgan Stanley. According to the American economist, the process of decline has only just begun. In the most pessimistic scenario, the world's first reserve currency could collapse by 35%.
"We're still only in the third round of a nine-game baseball game. If the forecast comes true, this will be an important exclamation point in the first year of Joe Biden's administration, " the author of the forecast notes.
There are many reasons for the decline, the main ones are the current account deficit of the US budget, the strengthening of the euro and the Fed's unwillingness to somehow influence the situation. On the other hand, you can find an explanation for this: the recession leaves no choice for the authorities, you need to pump the economy with liquidity.
This is not the first and hardly the last forecast regarding the fall of the dollar. Citigroup believes that the greenback will lose 20% this year. A similar opinion is shared by Goldman Sachs. The events of this year will not have the best effect on the US currency, analysts say.
It is important to understand that there are more emotions and negativity in such forecasts than there are real reasons. Thoughts about the collapse of the dollar periodically appear over the past decades, but so far this has not happened.
It is impossible to deny the obvious, namely, that the greenback has entered the risk zone. Too many factors add up to a single puzzle that points to a downward trend. In fact, the process of abandoning the dollar has been launched all over the world. Investors prefer to buy stocks, real estate, and raw materials, rather than invest in bonds with real negative yields. Gold has risen by 17% over the year, and the growth will not end there.
"The pandemic has provoked a sharp increase in public spending. In 2020, the volume of stimulus measures in the world exceeded 15%. The Federal Reserve has implemented financial market support programs in excess of all the incentives launched to eliminate the mortgage crisis in 2008-2009. Therefore, today the dollar index is trading closer to 90 p., and not to 100 p. This is only the beginning of the path to the weakness of the US currency, " analysts write.
To assess the demand for the dollar, you need to monitor the dynamics of treasuries and inflation. If the negative gap between these two indicators widens, the dollar will weaken.
