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A weaker US Dollar, but a EUR at an uncomfortable level too…

When we address the issue of the appropriate level of the USD/EUR currency pairs, it is difficult to assess the right level it should reach. However, at the moment, for COVID crisis reasons, we believe, USD is weaker. Does it help the European economies also facing tough times? I guess not…

A weak(er) Dollar strengthens abnormally a EUR that intrinsically seems weak as well. The Dollar's weakness against the EUR, and against other currencies, divides analysts on the Dollar's future role in trade. One can hear this idea by remaining skeptical about the Dollar's replacement in international trade, as its dominance remains strong. The Dollar has fallen to its lowest level in 2 years. The American government does not convince analysts about the exit of VIDOC and the measures taken. A EUR that is 10% stronger against the Dollar since the beginning of the VIDOC crisis, is more explained by the greater weakness of the Dollar than by the health of the EUR. The key question is whether the US will manage to maintain the dollar's role in international trade or whether China will succeed in imposing itself. VIDOC may be a turning point here as well. The TikTok case, for example, demonstrates the extreme tension between the two countries. The massive arrival of invested assets in Europe is explained by the issuance of new debts guaranteed by the European Union. Economists believe that the Dollar could rebound and return to the forefront. The Yen and especially the Swiss Franc have benefited from the weakness of the greenback. After a period of crisis that preceded a Sino-American trade war, there are fears of a budget war. The fight will be fierce, especially as American elections are looming in the autumn.

Many analysts and investors have focused on cyclical factors, blaming scaled-down expectations for US growth, lower interest rates and the rapid expansion of the US federal reserve’s balance sheet. It may worth asking how strong these forces are and how likely they are to persist. One of the most popular cyclical arguments for this USD softness is the American growth which will slow further. It also may be unable to bounce back quickly because of a possible second wave of the virus, spreading throughout the country. The overall uncertainty manifests itself in economic forecasts with a larger range of growth projections for America and Europe in the next year. It proves it seems complicate to predict the growth in the next 18 months and therefore the currency fluctuations. To take firm conviction on the EURODOL evolution seems to be risky at best. There are only few in the market betting on further Fed rate cuts. The rate differentials should remain compressed but steady. But all these speculations remain vain as there are so many uncertainties around the health crisis, which could come back in Fall. At the end of the day, economic history will tell us whether the economic world was changing profoundly, after the COVID-19, or not. I do not think so. The Dollar's weakness is only temporary, and we will see when we have returned to "some normality" if the founding economic principles continue to apply or if the world is simply mutating like a virus.

François Masquelier – SimplyTREASURY


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