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10.07.2020 09:36 AM
Good bye, power: Is USD no longer the king of the market?

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Clouds continue to gather over the US currency. The problems of the global financial market took it into circulation, and now it is very difficult to win everything back. Experts believe that the mechanism of total weakening of the dollar has already been launched, and the loss of its dominance is a matter of time.

The main impulses of dollar's weakening were a surge in risk appetite from investors who previously preferred protective assets (primarily USD), and concerns about another wave of COVID-19 pandemic. On Thursday, July 9, amid a rally of risky assets, demand for the currency of the "safe haven", in particular the dollar, declined sharply. According to analysts at Deutsche Bank, the market should tune in to further weaken the indicated currency.

The current state is not in the best way reflected in the dynamics of the EUR/USD pair. From time to time, the classic pair experiences serious volatility, experiencing a roller coaster ride once again. From declining to rising, the EUR/USD pair is one step apart, and this confuses the market. The pair completes the current week relatively calmly, having survived a series of ups and downs. On the morning of Friday, July 10, the EUR/USD pair was trading near the range of 1.1266 - 1.1267, but then slightly plummeted.

Experts explain the increasing pressure on the US currency not only by the restoration of demand for risky assets, but also by investors' doubts about the further steady growth of the US economy. Analysts fear a noticeable deterioration in macroeconomic data from the United States, which will put another step in the country's economic growth.

The "first sign" of this deterioration was the information on the budget deficit in America, published on Wednesday, July 8. It turned out that the state budget deficit increased significantly and amounted to $ 863 billion in the first month of summer. The current deficit was also caused by tax cuts and a parallel increase in benefits. According to the U.S. Budget Office, spending totaled $ 1.1 trillion in June. At the same time, US budget revenues fell by 28%, to $ 242 billion. The reason for the deterioration was a sharp decline in economic activity and wages. This can seriously complicate the further dynamics of the dollar and the recovery of the national economy.

Experts consider a catastrophic increase in government spending as a traumatic factor for the near future of the American economy. Experts emphasize that it is three times higher than pre-crisis indicators. This was necessary to mitigate the negative impact of the coronavirus pandemic. Such expenses will not go unnoticed for the economy, although in this case, the end justifies the means.

The most negative expectations are associated with the third quarter of 2020, when a number of experts predict a significant subsidence of the dollar. It is possible that the USD will lose its position in the period between the third and fourth quarters by saying goodbye to the power in the world market. Such a scenario seems unbelievable, but many currency strategists warn of such a shocking option.

Experts consider the devaluation of the US dollar as one of the ways to reduce the inexhaustible volume of the dollar mass, flooding the world markets. According to analysts, this will help a relatively sustainable recovery of the global economy. To do this, the Fed will have to weaken the financial reins in order to slow down the dollar flow. However, experts are sure that this will be a tangible loss for the dollar.

If the Fed changes its current strategy, it will have to limit bond yields by revising its fiscal policy. Such measures will expand budget spending related to public debt in order to help the market to effectively use cash injections. In the short term, the Federal Reserve and other central banks managed to gain time by raising asset prices and avoiding the traumatic consequences for stock markets. However, the position of the US currency may become critical in the fourth quarter of 2020, after the struggle for the presidency in the United States.

Experts believe the presidential election in the United States, which will be held in early November as an additional factor provoking the collapse of the dollar. One possible candidate for the presidency is Democrat Joe Biden, whose victory can turn into a failure for the dollar. Having led the country, the new leader will seek to increase spending on infrastructure, healthcare and other social sectors that contribute to inflation. Economists do not exclude that the results of Biden's leadership will be an increase in taxes, an increase in the minimum wage and other measures that deprive corporations of profits and reduce investor interest in American assets.

The problems in geopolitics and the global economy that have accumulated over a long time are undermining the position of the dollar. Experts fear that difficulties, like a snowball rolling from a mountain, will begin to build up pace and crush the dollar. Its power is a big question, and with the strengthening of negative factors, this question will generally disappear. As a result, the US dollar will have to say goodbye to its dominant status, losing the financial throne to the euro, and possibly to the yuan in the distant future. However, there is still hope for the recovery of the USD, which has been building up its potential for a long time. Therefore, experts are sure that the US currency will still compete for a place.

Larisa Kolesnikova,
Analytical expert of InstaForex
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