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21.01.202116:49 Forex Analysis & Reviews: Will Biden allow the dollar to set new record low?

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Exchange Rates 21.01.2021 analysis

The dollar continues to fall, and analysts, in turn, are slowly convinced of the long-term nature of this negative trend. It turns out that its growth in January was just a small respite. This is all obvious, but the question arises, what pushes the dollar down and where is the limit of its fall?

Democratic policies have always supported a strong dollar, and investors hoped that even now, after the coming to power of this party, the dollar will live its former life. But their expectations, most likely, will not be met. This is after the speech of Treasury Secretary nominee Janet Yellen who did not mention the policy of a strong dollar, but rather how it could lead it to an even greater collapse.

If Yellen takes the post of the Treasury secretary, her department, together with the US Federal Reserve, will carry out a risky policy that can provoke a serious fluctuation in the exchange rate of the US dollar. Yellen has recently called for a large-scale injection of liquidity into the economy and asked lawmakers to expand support measures.

The position of the new authorities can be perceived by investors "sitting" on the dollar as a signal for a long decline in the USD. It should be noted that so far, apart from statements and forecasts, there are no fundamental indicators for a deep fall in the dollar.

The forecasts about the collapse of the exchange rate are based solely on the unprecedented measures to pump the US financial system with liquidity. Thus, the US authorities decided to not only fight the crisis. They really want to weaken the dollar to create a competitive advantage for local producers in the global market.

Let's say they succeed. After a while, US goods will fall in price, and demand will grow. However, US competitors will lose part of the sales market and are unlikely to watch it calmly. Europe or the UK will also begin to take measures to weaken their own currencies. A struggle between printing presses will begin, and its outcome is unknown. It won't come to that, too much will have to be at stake.

The dollar will regain its position over time, but as long as the monetary policy in the United States remains unchanged, a gradual weakening of the exchange rate is inevitable.

However, there is no talk of any collapse. This will not happen as long as the lion's share (56.6%) of the world's foreign exchange reserves is invested in dollar assets. For example, for the closest competitors, this share is much more modest, for the euro - 19.2%, for the Chinese yuan - 2%.

Indeed, over the past two years, the share of the US dollar in world reserves has decreased, but there can be no turning point, the scale of the numbers is not the same.

Does the US economy need a weak dollar?

A cheap dollar can have negative consequences for the country. The American economy is far from export-oriented; it largely depends on imports. A collapse in the classical sense is capable of shaking not only the US economy but also the global system.

As experts explain, a deep dollar sinking can "cause a surge in inflation, which will threaten the Fed's ultra-loose monetary policy and limit the possibilities for fiscal stimulation of the economy."

The rapid decline in the dollar will hit the US debt market as well. This will negatively affect other markets, as well as the ability of the American authorities to finance the huge budget deficit by placing government bonds. The deficit, I must say, is only increasing.

Considering all of the above, the US dollar will weaken in the long term. However, the dollar index is unlikely to rewrite the lows recorded late last year in the region of 89.2 p. The most plausible for the dollar, according to analysts, is its return to the basket of competitors in the region of 91-93 p

Exchange Rates 21.01.2021 analysis

Natalya Andreeva
Analytical expert of InstaForex
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