19.05.202108:30 Forex Analysis & Reviews: Is there a limit to the US dollar's long-term decline?

One of the important tasks of market participants is to find a price bottom for the US currency. Experts and traders are wondering: is there a limit to the long-term decline of the US dollar? There is no clear answer, so the research continues.

On the evening of May 18, the US dollar declined to a six-year low against the Canadian dollar, and other currencies near the multi-month lows. The reasons for this lie in the expectations about the continuation of low rates and the previous volume of the asset purchase program (QE) by the Fed. As a result, the pressure on the US currency increased, including due to the regulator's dovish position. Fed representatives emphasize that the instability of the US labor market causes pressure on prices, but consider it as a temporary phenomenon.

In view of the regulator's "dovish" comments, a negative background has formed for the US currency. In this situation, the dollar index (USDX) plunged by 90 points – a psychologically important support level recorded for the last five months. MUFG bank analysts highlighted that the prolonged collapse of the dollar nullifies all the achievements during the previous weeks. The situation is compounded by the Fed's refusal to tighten its current monetary policy.

Experts have been recording massive dollar sales across the entire spectrum of the market for several days. The US dollar will continue to fall if volatility increases on the US Treasury bond market, and the Fed's position remains unchanged. According to analysts, the current situation is favorable for dollar bears.

At the same time, the market is anxiously watching the downward reversal of the US currency, especially in the EUR/USD pair. On Wednesday morning, the main currency pair was moving around the level of 1.2235, testing higher levels. Experts believe that the nearest target of the pair will be the level of 1.2500, which will be reached within one to two months.

The strong recovery of the American and European economies plays a key role in the long-term decline of the US dollar. It can be noted that the EU economy started to grow after the US one, which was actively supported by stimulus programs. Analysts said that the current situation provoked an increase in risk appetite and a decline in the dollar.

Experts cite another argument in favor of a long-term fall in the USD – the growth of the money supply in the United States. The increase in this indicator occurs exponentially (24% yoy against 10% yoy in the euro area). Currently, the growth rate of the money supply in the US is much higher than in the Eurozone by a record 14%.

The divergence in the inflation rates in the US and Europe is also important for the further dynamics of the EUR/USD pair. Against this background, experts believe that the long-term target of the pair is the level of 1.3000. If the growth rate of the money supply in the US remains high (which will put pressure on the dollar), then the EUR/USD pair may likely reach the level of 1.4000 in the near future.