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21.01.202109:31 Forex Analysis & Reviews: What are the prospects for the US dollar in the short and long term?

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Exchange Rates 21.01.2021 analysis

On January 20, the 46th President of the United States was inaugurated and the markets reacted to this event very positively. So, the S&P 500 and NASDAQ indexes reacted with record highs, but the dollar's quote significantly declined, as investors turned their attention to riskier assets amid general optimism in the markets. This morning, the US dollar declined by 0.20% against a basket of six other currencies, strengthening its position near the level of 90.29.

Exchange Rates 21.01.2021 analysis

There is still a fairly high level of COVID-19 cases in the world despite the spread of vaccines and it is holding back the already very slow economic recovery in both the United States and other countries. In addition, the recent political turmoil in Washington, DC, as well as the recent attack on the US Capitol, form a general background of uncertainty and encourage international market participants to avoid risk and buy a more reliable asset – US dollar.

However, investors believe that the new US $ 1.9 trillion aid package proposed by Joe Biden will either weaken the dollar or limit its growth in the near future. The new president's proposed economic stimulus was backed by Democratic leaders in Congress. Moreover, the new US Treasury Secretary Janet Yellen, announced yesterday that she plans to develop a second aid package. If the announced plans are implemented, inflation will certainly rise, which will initially work against the US dollar, putting the blame on the supply problem. It's quite simple: if there is a lot of a particular product, it will be cheap – if there are a lot of dollars, it will be weak. In this case, there will be a risk of a dollar decline in the short term.

But if we consider the US dollar's prospects in the future, then the quotes will most likely increase. The infusion of such large-scale funds, which are expected from the Democrats in the near future, will contribute to the growth of supply and will definitely significantly stimulate the economic growth of the United States compared to other countries. And a confident recovery and stability of the US economy will ensure a significant growth in the dollar. However, it is not necessary to expect this in the coming months, since such a scenario is possible only in the medium and long term.

According to RBC Capital Markets, a lot of investors today believe that the dollar will further decline. The weakening value of the US currency over the past year has provoked investors to buy riskier assets, namely emerging market currencies. Many leading investors believe that risky assets will necessarily grow above their maximum values observed in 2020. For example, Mark Haefele, Chief Investment Officer of UBS Global Wealth Management, expanded access for his clients to such high-yielding currencies as the Indian rupee to benefit from the US dollar's depreciation.

Francesca Fornasari, Head of the Currency Solutions department of Insight Investment, has a different opinion. She believes that in light of the high level of COVID-19 and the slow economic recovery, the US dollar will become more attractive to investors than other currencies. Fornasari admits that she cannot find an alternative and at the same time, reliable assets in which it is possible to invest without risk. Apparently, the negative attitude towards the dollar has reached its climax and will most likely change soon to a more positive one. At the same time, she also said that Asian currencies will continue to grow in relation to the US currency.

In turn, Seema Shah of Principal Global Advisors believes that the dollar will continue to decline, which will be supported by the additional incentives of the new US administration. Moreover, this is another proof for foreign investors that the current year promises to be favorable for US stocks.

It is also likely that the dollar will find support in the acquisition of new debt obligations by foreign investors, which the US authorities may issue in order to finance additional incentives. For global fixed-income investors, the existing 10-year Treasury bond yield above 1% is the most preferred over the negative rates on large investments in Europe and Japan.

A strong rebound in the US economy could contribute to the dollar's growth. As soon as the coronavirus recedes, new hires will emerge and consumer confidence will rise. The Fed will begin raising interest rates, which in turn, will make US bonds even more attractive to investors in the near future. A growth in interest rates will also lead to an increase in the rate that investors receive for holding assets denominated in dollars. This will cause the demand for the dollar to rise.

Considering the improving US economic outlook, many foreign investors are not going to leave the US markets. They are expected to continue to keep the shares of various US technology companies that survived the coronacrisis. It is worth recognizing that foreign investors still view US assets as a profitable investment.

Andreeva Natalya
Analytical expert of InstaForex
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