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09.10.2020 10:46 AM
EUR/USD: What should the US dollar expect?

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A constant source of concern for the markets is the further dynamics of the USD. In addition to the threat of depreciation, experts fear that the US dollar will be nullified.

Experts believe that its potential nullification could unbalance the global financial system. It should be noted that nullification is eliminating the significance of the means of payment, which is contrary to devaluation, that is, a decline in the real exchange rate due to a reduction in the gold content of each monetary unit. As a result, the nullified currency is almost completely reset, while the devalued currency, whose payment value has decreased, has a chance of recovery.

Nevertheless, analysts say that the US currency should be afraid of devaluation, instead of nullification, since it may irrevocably lose its value in the long term. Experts consider the upcoming US presidential elections to be the main threat to the dollar's further growth, but many are confident that it will drop, regardless of their results.

At the moment, the USD is caught between a crossroad – monetary strategies from D. Trump and J. Biden. Investors are trying to figure out which of these strategies is better: the modest fiscal stimulus and income tax cuts proposed by Donald Trump, or the corporate tax and monetary stimulus growth expected from Joe Biden. It is advantageous to increase incentives in the medium term, but experts believe that strengthening tax discipline is more reliable in the long-term.

Now, the position of the US currency which has repeatedly experienced the "swing effect" is being shaken by the current situation. According to experts, Joe Biden's possible victory will be the first step towards dollar's weakening in the long term. Experts believe that this is due to rising government spending and taxes, which are worsened by inflation targeting, low interest rates, as well as Feds' quantitative easing (QE) program.

In view of these factors, the dollar may further plummeted below. Its unstable dynamics negatively affects the EUR/USD pair, which has experienced serious volatility this week. Today, this classic pair is trading in the range of 1.1773-1.1775. It is slightly losing its positions, but still making an attempt to reach high levels.

Experts are sure that the USD will face a series of decline anytime soon, but it may still turn out to be dominant among the key currencies in the long-term. However, they do not exclude the possibility that the US currency will have to share its victory with the European one. At the same time, analysts emphasize the strong ability of the US dollar to recover and high resistance to any negative factors. In turn, the market should consider the possibility of risks.

Larisa Kolesnikova,
Analytical expert of InstaForex
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