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26.02.202010:59 Forex Analysis & Reviews: Two faces of the dollar: a powerful currency and a pawn in a strange game

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Exchange Rates 26.02.2020 analysis

The American currency tops the list of the world's major means of payment, competing only with the European and British. It is a strong leadership but the other side of the coin is that the greenback often becomes a bargaining chip in the game of central banks in the literal and figurative sense of the word.

For quite a long time to this day, the dollar has held key positions in world financial markets, particularly in the global debt market. Note that since the beginning of the 21st century, more than 50% of bonds on the world financial market are issued in dollars, 30% in euros and slightly more than 7% in yen.

According to analysts, the dominance of the dollar is stable, despite the global recessions, defaults, an increasing role of China in world trade, competition of the European currency, and etc. However, the unlimited issue of American currency creates the conditions for a global financial bubble. The destabilizing factor, or rather, the headache of the global economy, is the ability of the United States to accumulate large-scale public debt without worrying about the consequences.

The US currency remains attractive against the backdrop of a weakening European economy, which forces global central banks to increase monetary incentives. Such measures weaken the exchange rate of national currencies against the greenback, experts warn. At the same time, the dollar's position, at first glance, is strong but is quite shaken due to manipulation by the Fed and global regulators.

Currently, the growth driver of the US dollar has become the epidemic of the coronavirus or otherwise known as COVID-19. This year, the USD index rose significantly, rising by 3.5%. According to analysts, this contributed to the growth of the American currency to the highest level since 2017. Thanks to this rise, it has become the best among key world currencies since the beginning of 2020.

The current situation has led to a rally of the dollar, which is caused by large-scale investments in US stocks and bonds. Investors hope that America will remain virtually immune to the negative economic effects of coronavirus, which threatens to slow down the Chinese economy. Currently, investors prefer the greenback as a safe asset, although the yen has traditionally remained the former contender for this role.

The current situation largely contributes to the strengthening of the position of the US dollar. However, for multinational US corporations, strengthening the greenback is extremely undesirable, since it entails a rise in the cost of converting foreign income back into dollars. Experts believe that a stronger USD will also increase the burden on developing countries, especially those affected by the negative effects of China's economic slowdown. The dominant influence of the growing greenback is also causing a flurry of criticism from US President Donald Trump. Recall, that Trump repeatedly emphasized that other states benefit from a strong dollar at the expense of the United States.

On Tuesday, February 25, the American currency kept its balance. Experts expect the Fed to lower interest rates this year to offset the downward pressure on the economy caused by the COVID-19.

Recall that the initial increase in the dollar was due to the large-scale spread of the coronavirus, after which investors began a mass flight to all US assets, considering them safe investments. The current situation has led to the fact that the probability of lowering interest rates by the Fed has increased significantly. The easing of monetary policy is already laid in the expectations of the market, analysts say. Most traders expect that this year the regulator will reduce rates to 1% –1.25% compared with the current range of 1.5% –1.75%.

Against this background, the European currency remains under strong pressure caused by the deterioration of macroeconomic indicators in the eurozone. The bandwagon euro was framed by weak data on the German economy, and later on the economy of France and Italy. They cannot be called disappointing, since the market surrendered at current statistics, not expecting any breakthrough from the European economy.

The current German GDP growth indicators coincided with the forecasts of economists, due to which the euro managed to maintain its gained position. However, experts believe that a slight strengthening of the euro is a temporary phenomenon since now there are no significant factors supporting it.

In the EUR / USD pair, analysts are paying attention to the continuation of the downward trend. On Tuesday, the tandem was near 1.0856–1.0857, trying to rise higher.

Exchange Rates 26.02.2020 analysis

On Wednesday, February 26, the pair made a breakthrough, rising to the round level of 1.0880. However, it was not easy to gain a foothold on it, and from time to time the tandem fell to lower values.

Exchange Rates 26.02.2020 analysis

Experts concluded that the controversial position of the dollar will continue in the near future. According to them, it will continue to be the strongest world currency, but this does not prevent the greenback from remaining a toy in the hands of the global financial system.

Larisa Kolesnikova
Analytical expert of InstaForex
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