Contrary to popular belief about a weaker US dollar, some analysts do not believe in such an outcome. Currency strategists analyzed the existing misconceptions about the upcoming decline in the greenback, noting that it is too early to draw such conclusions.
The reason for pessimism over the American currency was a number of factors. First of all, one of the causes was its fall on the eve of Catholic Christmas. In early trade on Friday, the euro/dollar pair was trading around 1.2199. Then the quotes advanced to the area of 1.2200-1.2201 and consolidated near the level of 1.2200. At the same time, analysts do not rule out that the pair will continue its correction. The nearest support level is 1.2100. In case the quotes consolidate above 1.2200, the level of 1.2500 can be seen as the next target.
According to experts, in the current conditions and amid a weaker dollar, the European currency stands to gain, which has already added 0.10%. This was largely due to the fact the UK and EU have finally concluded a trade agreement. On Thursday evening, December 24, the parties agreed on Brexit. The agreement will enter into force on January 1, 2021, experts emphasize.
The long-awaited positive changes in the market increased investor risk appetite, provoking pressure on safe-haven assets, primarily on the US currency. The greenback tried its best to hold on at the current levels, but it turned out to be rather difficult. Analysts have debunked four myths, pointing to a further decline in the US dollar, although many opponents see it as inevitable.
Experts believe that the first misconception is that investors' interest in the US dollar may disappear amid growing uncertainty. However, on the eve of the year 2021, the level of anxiety and uncertainty caused by the COVID-19 pandemic has dropped sharply. This was facilitated by the development of effective vaccines against the coronavirus. As a result, interest in the greenback as a safe-haven asset has declined, but this is a temporary phenomenon. As for the euro/dollar pair, market participants have taken this factor into account, analysts say.
The second misconception about the US dollar's collapse is the US Federal Reserve's monetary policy. Many experts argued that the dollar would suffer even greater losses if the regulator kept printing money, but that's not true. Undoubtedly, the Fed's steps to expand the balance sheet and ease its monetary policy were much more aggressive than other central banks' actions. However, the American regulator managed to stop and it did not cross the line separating fiscal aid from flooding the market with cash. At the same time, other central banks, in particular the ECB, cannot boast of similar actions yet.
The third misconception about the dollar's fall is the US federal budget deficit that could sink the currency. However, the United States has long had two deficits: the budget deficit and the current account deficit, which are financed by capital imports from abroad. To attract foreign capital, it is necessary to increase the attractiveness of US assets by making the greenback cheaper. This so-called "double deficit" was a powerful argument for supporters of the dollar's collapse during the financial crisis. However, the greenback turned out to be more stable than expected. According to analysts, the US budget deficit continues to grow, but it is unlikely to have a severe impact on the US currency.
Experts believe that the fourth misconception about a weaker US dollar is the end of the US geopolitical dominance, which could result in a collapse in the main world currency. The United States' economic dominance started to fade due to Donald Trump's unstable policies, dragging the US dollar down. However, many experts hold the opposite views, believing that the current situation is ambiguous, and the arrival of new President Joe Biden will help resolve this issue.
Despite a 10% decline in the US dollar index since March 2020, the greenback remains a leader in the global market. Of course, it is trading under pressure from a number of negative factors, but the US dollar is still taking the lead. Many experts are confident that the dollar's downward trend will continue in the coming year, and the greenback will sink by 20% or more. However, their opponents believe that the risks have been greatly exaggerated, otherwise the collapse would have occurred long ago. The US currency is unsinkable, and its difficulties are temporary, experts sum up.