14.05.202010:02 Forex Analysis & Reviews: Dollar goes all-in: The US economy is at stake

The tension in the air of world markets, strengthened by the rampant COVID-19 pandemic, occasionally flares up and disrupts the relatively smooth dynamics of world currencies. The US currency, which has partially adapted to the pandemic instability, has come under the pressure of high risks again.

The catalyst for another stress for the USD was the speech by Jerome Powell, chairman of the US Federal Reserve, which was held on Wednesday, May 13. The head of the Federal Reserve noted the deplorable state of the world's leading economy, a practically bloodless struggle with the consequences of COVID-19. According to J. Powell, the country expects a long period of weak growth and stagnation of incomes. He also promised to do everything possible to stabilize the situation, while he did not rule out an increase in budget spending.

These statements by J. Powell increased the tension of the market, as the Federal Reserve was assigned the status of a "hawk" regarding the budget deficit, and such financial generosity puzzled investors. Market participants perceived the statements by the head of the Fed as a hint of unprecedented risks that the US economy had not encountered before. Experts are sure that the result of this collision is unpredictable and most likely will not bring anything good.

According to J. Powell, the duration of the risks associated with a pandemic at times increases the probability of bankruptcy of enterprises. An additional traumatic factor for the US economy is a sharp decline in household income in the current crisis. According to the Fed survey, about 40% of American households with incomes of less than $ 40 thousand were either below the poverty line, or their representatives joined the ranks of the unemployed. At the end of his speech, the head of the regulator called on Congress to increase the package of economic assistance to combat the effects of the pandemic. It can be recalled that at the moment, the amount of funds allocated for the "scarring" of the economy reaches an impressive $ 3 trillion.

To the surprise of analysts, the statements of J. Powell was a pleasant surprise for the US currency, providing it with significant support. Experts consider the low probability of negative rates from the Federal reserve to be an additional bonus of his rhetoric. According to experts, in this situation, not only the further movement of the dollar was at stake, but also the recovery of the entire American economy. The awareness of the globality of what is happening puts pressure on the markets, but gives a powerful boost to the dollar, analysts say.

The upward trend in the EUR/USD pair has given a chance to the dollar bulls, but the further development of the situation is still in question. On Thursday morning, May 14, the specified currency pair was trading near the low values of 1.0805 - 1.0806, making desperate attempts to break through this barrier. In part, this was possible, and the pair rose to 1.0810 - 1.0811.

The explosiveness of the economic situation in the United States confirms the opinion of one of the leading analysts at Bloomberg. He believes that the relative calm of the US economy is guaranteed until the United States begins to pay its huge debt. According to the specialist's calculations, the large-scale fiscal stimulus initiated by the American authorities will lead to further "inflation" of the state debt and will end in a deafening collapse of the dollar. Bloomberg experts warn against such a finale when everything is at stake - both USD and US economic growth.

At the same time, analysts consider destructive macro statistics as another time bomb that undermines the US economy and national currency. On Wednesday, May 13, disappointing data on US inflation was published, which was worsened by weak data on the producer price index. It can be recalled that April inflation in the US came out negatively, demonstrating a noticeable decline in consumer activity. The total consumer price index fell to -0.8%, the inflation rate could not overcome the minus value (-0.4%), and the "red-zone" producer price index became the finale. The last indicator added "black paint to the overall canvas": it fell to -1.3%, to multi-year lows.

However, despite the depressing picture, experts urge not to give in to panic. Experts argue that the US economy has a room to rise, and its current retreat is a tactical maneuver needed to gain time.

According to analysts, the US currency behaves in a similar way. The dollar acts contrary to circumstances, overcoming the negative consequences of COVID-19. Moreover, "American" bears hardships along with the national economy, predictably striving for leadership. Experts are cautious in their forecasts, however, they believe that the USD will cope with current risks, and its determination and activity will give the market a new impulse in the medium-term.