US dollar to weaken as coronavirus recovery forges ahead

The U.S. dollar is set to weaken further as risky assets gain momentum while the economy recovers from a COVID-19 induced slowdown, according to Wall Street analysts.

The greenback, which is mired in a four-week losing streak, its longest in nearly one and a half years, has fallen 6.69 percent from its year-to-date peak on March 20 through Friday.

“Although the U.S. dollar has stabilized over the past month or so fears about a second wave have held back the rebound in risky assets, we continue to think that it will lose further ground over the rest of 2020, unless the resurgence of new cases undermines the global economic recovery,” wrote Jonas Goltermann, senior markets economist at London-based Capital Economics.

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A resurgence of new COVID-19 infections, which crossed above 70,000 for the first time last week, has caused a number of U.S. states to pause or roll back their reopenings, putting the pace of the economic recovery in limbo.

However, Wall Street economists remain steadfast in their calls for a sharp rebound from the deepest economic contraction of the post-World War II era following unprecedented action from policymakers. Bank of America forecast earlier this month the U.S. economy would contract at an annualized rate of 35 percent in the three months through June before growing by 20 percent and 6 percent in the third and fourth quarters, respectively.

Congress has passed more than $3 trillion of aid and is working on another round of stimulus while the Federal Reserve has slashed interest rates to near zero, announced open-ended asset purchases and introduced lending programs to support the flow of credit to small businesses and households.

The extraordinary measures have caused U.S. equities, which are roughly flat for the year, to vastly outperform the Stoxx 600 which has fallen 10.6 percent.

At the same time, the U.S. 10-year yield’s premium versus German Bunds has “slowly eroded” and is threatening to fall below 100 basis points for the first time six years, according to Marc Chandler, chief market strategist at the capital markets trading firm Bannockburn Global Forex.

He believes that conditions are ripe for a “near-term bounce,” but that such a move would offer a “new opportunity for those looking to buy foreign currencies or to hedge the dollar exposure.”

Capital Economics’ Goltermann believes global central banks will remain “ultra-loose for several years” to support the economic recovery, meaning it will be difficult for the Fed to pursue a more aggressive strategy than its peers, especially since the central bank has pushed back against the idea of negative rates.

However, he warns the dollar would counterintuitively strengthen if the economic recovery were to falter as investors would ditch risky assets for safer ones.

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Still, he sees the greenback weakening over the second half of the year as it remains well above its long-term average, giving it “plenty of scope” to turn lower.