The battered dollar’s long-term fortunes are unlikely to improve regardless of who wins Tuesday’s U.S. presidential election, investors and analysts said.
Despite its recent bounce against a basket of currencies, the dollar index =USD is still down about 9% from its March highs and on track for its worst year since 2017, weighed down by expectations that U.S. rates will remain near historic lows for years to come.
Many market participants believe that a victory by Joe Biden - currently the front-runner in polls - and a potential Democratic sweep would likely weigh on the U.S. currency further, as the former vice president is expected to open the door to policies that investors view as dollar-negative, including robust fiscal stimulus.
Four more years of a Donald Trump presidency may offer a less-clear path for the dollar. Although a continuation of Trump’s belligerent approach toward China would likely boost the dollar’s allure as a haven asset, those gains may be outweighed by factors such as continued negative U.S. real yields, analysts said.
A Reuters poll last month showed analysts’ median forecast looking for the euro to rise to $1.21 in a year, up about 4% from current levels.
Here are some of the main factors expected to influence the dollar over the long term.
RATE DIFFERENTIALS
For years, comparatively high U.S. interest rates relative to other developed countries supported the dollar by making it more attractive to investors seeking yield.
That yield advantage shrank in 2020, when the Federal Reserve slashed interest rates to combat the economic fallout of the coronavirus pandemic and pledged to keep them at historic lows for years.
“The biggest FX trends ...will be the COVID-induced downward convergence of interest rates,” said Kit Juckes of Societe Generale, in a note to clients. This “is unambiguously negative for the dollar, and far from priced-in.”
REAL YIELDS
Real, or inflation-adjusted, yields on U.S. 10-year Treasuries plunged below zero in 2020 amid the coronavirus pandemic. That has diminished the dollar’s attractiveness and fueled rallies in everything from stocks to gold.
A Reuters poll in September showed analysts expected the yield to rise to 0.93% in 12 months, about half the expected average inflation rate, suggesting negative real returns over the coming year.
“We do not see a scenario which would derail a resumption of the (dollar’s) current broad downtrend, as U.S. real yields are likely to remain negative,” analysts at BNP Paribas wrote.
RESERVE STATUS
Trump has railed against a strong dollar throughout most of his term, complaining that it gives other nations an unfair competitive advantage in trade.
Although the accelerated fiscal spending expected in a potential Biden presidency may weigh on the dollar, some believe the Democrat’s less confrontational approach to foreign policy may bolster the dollar’s appeal as a reserve currency.
Biden “will not talk the (dollar) down; and he will embrace multilateralism, including the framework that has built and supported the (dollar’s) reserve currency status,” wrote Alan Ruskin of Deutsche Bank.
Reference: CNBC
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