Georgette Boele

Senior FX & Precious Metals Strategist

Longer-term dollar outlook is deteriorating

4 June 2020 - So far this year, the US dollar has risen versus major currencies and even more versus a broad basket of currencies. Do we expect this trend to continue? In the near-term (up to 3 months) yes, in the longer-term no. We expect a lower dollar in the longer term.


Lower safe haven demand

Major central banks and governments have announced massive stimulus packages. In a large number of countries, the lockdown and other measures taken by governments have resulted in a decline of COVID-19 casualties. As a result, measures are being relaxed to support the battered economy. After macro and earnings disappointments in the next few months, later this year investors could start to look forward to a strong and durable recovery in 2021. Therefore, over the medium term, investors will shy away from safe-haven currencies such as the US dollar and Japanese yen and be open for alternatives. Interest rate spreads, relative growth outlook, relative real yields, political uncertainty and also valuation will come to the fore again. It is likely that these factors will weigh on the dollar going forward.

More reasons to expect a dollar decline

On 23 March, the Fed announced an unprecedented scale of monetary easing. It moved from quantitative targets for asset purchases to a ‘whatever it takes’ commitment. Never before in history has quantitative easing (QE) been so aggressive and large. Moreover, the Fed’s QE programme is larger than easing measures provided by other central banks. We think that as soon as safe-haven demand fades, the Fed’s QE programme will weigh on the dollar. The QE is simply too large for the dollar to ignore.

There are more reasons why the dollar will probably decline. The US government has announced large fiscal stimulus to support the economy. This will support the economy, but a deep recession will of course not be avoided. Our view for the US economy is still more negative than consensus. The sharp deterioration in the fiscal deficit in the US will weigh on the US dollar. Not only is the size of the deficit exceptionally large, it is also much higher than the prognosed fiscal deficit in other countries. Meanwhile, our US 10-year Treasury yield forecasts are below market consensus for 2020. Furthermore, it is likely that elections in November will weigh on the dollar unless there is a strong conviction who will win the presidential elections. Not only are the fundamentals for the dollar deteriorating, the US dollar is also strongly overvalued according to various metrics. Taken altogether, unlimited QE, weaker economic fundamentals and election uncertainty will be negative for the dollar.

EUR/USD to recover later in the year

We think that the dollar will struggle as soon as safe-haven demand dries up. We expect the dollar decline to start in the second half of this year. It is likely that this will be a multi-year decline. We think that the fortunes of the euro versus the dollar are dampened for several reasons. First, we expect a step-up of the ECB PEPP asset purchase programme, and the additional amount of asset purchases we expect is larger than market consensus. Second, the German Court Ruling on the ECB purchases under PSPP (the ECB’s earlier asset purchase programme) could also cause uncertainty and dampen interest for the euro. Third, we expect a double dip recession in the eurozone. Our year-end forecast for EUR/USD stands at 1.12.

Georgette Boele - Senior FX & Precious Metals Strategist