A Weaker Dollar?
Published in O Jornal Económico
(Portugal) on 24 July 2020
by Filipe Garcia (link to original)
The U.S. dollar’s surge past the $1.15 per euro exchange rate may be signaling the beginning of a period of depreciation in American currency. The new rate trends above $1.15 are the highest since the autumn of 2018, and, while it is true that the recent European Union deal on an economic recovery fund has helped the “single currency,” it is also true that the dollar has lost value relative to most currencies, as well as gold.
There are many possible explanations for what is happening in the currency exchange market, but five essential factors stand out. One is the very European Union deal mentioned earlier, particularly significant in that it includes the joint issuance of debt bonds, and is thus a step toward an eventual “fiscal union.”
A second factor is the decrease in risk aversion approaches. While the U.S. dollar maintains its status as a safe haven currency, the markets, as can be seen in the stock market trends, are in an optimistic and less volatile mood.
A third factor is the reduced scarcity of dollars in international markets, something much discussed during the peak of the pandemic-related crisis. The subsequent massive injection of dollars by the U.S. Federal Reserve and the agreements on currency swap lines with various central banks have, for the moment, addressed the issue.
On the other hand, a sense of unease about the U.S. is increasing as the election in November draws closer. There is some concern that the Democrats will sweep all the contests and implement policies that emphasize greater spending and a general increase in taxes, thus frightening investors.
Finally, the growing conflict with China could lead that country to be less interested in purchasing U.S. currency and debt, as it has done for a while, and consequently reduce global pressure to buy U.S. dollars.
There are many possible explanations for what is happening in the currency exchange market, but five essential factors stand out. One is the very European Union deal mentioned earlier, particularly significant in that it includes the joint issuance of debt bonds, and is thus a step toward an eventual “fiscal union.”
A second factor is the decrease in risk aversion approaches. While the U.S. dollar maintains its status as a safe haven currency, the markets, as can be seen in the stock market trends, are in an optimistic and less volatile mood.
A third factor is the reduced scarcity of dollars in international markets, something much discussed during the peak of the pandemic-related crisis. The subsequent massive injection of dollars by the U.S. Federal Reserve and the agreements on currency swap lines with various central banks have, for the moment, addressed the issue.
On the other hand, a sense of unease about the U.S. is increasing as the election in November draws closer. There is some concern that the Democrats will sweep all the contests and implement policies that emphasize greater spending and a general increase in taxes, thus frightening investors.
Finally, the growing conflict with China could lead that country to be less interested in purchasing U.S. currency and debt, as it has done for a while, and consequently reduce global pressure to buy U.S. dollars.
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