During the U.S. session on Tuesday Beijing time, the U.S. dollar index continued to fall during the day, falling as low as 93.3, down 0.7%, the biggest drop since the end of August. Non-US currencies were collectively higher, with the pound up 1.25% against the dollar, the New Zealand dollar up more than 1% against the dollar, and the Australian dollar up 1.5% against the dollar.
The U.S. election has begun, and Tuesday’s European session began with a general rise in risk assets, while the U.S. dollar index, which had been strong in previous sessions, was under pressure to move down, and the U.S. index, which had been rallying for several sessions, appeared to be turning back down.
Most of Wall Street’s foreign exchange strategy analysts believe that the U.S. election is difficult to change the current situation of the dollar to short-dominated, and may even lead to more short entry.
The Reuters survey shows that despite the tense market atmosphere before the election and the surge in new crown epidemic cases in Europe and the United States and other countries, short bets on the dollar are expected to continue and even increase shortly after the U.S. presidential election on November 3.
In terms of positions, short dollar bets have exceeded long dollar bets for 31 consecutive weeks, although the dollar’s net short position has been reduced in the last week, but this situation has not changed.
The survey results also show that analysts are generally not optimistic about the dollar’s performance after the election. In the October 27 to November 2, 42 analysts surveyed, nearly 70% (29) said that the dollar net short positions either remain unchanged, or immediately after the U.S. election to rise further. Only 13 analysts believe it will continue to decline.
Forex strategists expect the dollar to weaken against most major currencies in the coming year. Steve Englander, head of global G10 forex research at Standard Chartered, said the next move for the dollar depends on the U.S. election, and the question now is how much room, if any, the dollar has to rally, which could be seen by many investors as an opportunity to go short.
Francesco Pesole, a foreign exchange strategist at ING, pointed out that the dollar’s position placement is still clearly biased toward net short positions, and if Biden wins the U.S. election, there is certainly more room for the dollar’s net short position to grow.
French Societe Generale (Societe Generale) head of foreign exchange strategy Kit Juckes (Kit Juckes) believes that the dollar is still too expensive in terms of current spreads. After the election, the dollar is likely to return to the lows it hit during the epidemic.
For his part, Marc Chandler, chief strategist at Bannockburn Global Forex, argues.
“Regardless of the election outcome, the dollar has entered a relative down cycle. The underlying factor in the dollar’s weakness is pressure from the twin U.S. trade and budget deficits.”
The dollar index has been in a downtrend since the U.S. index climbed to its highest level since 2002 earlier this year. The main reasons are rising trade and budget deficits and market expectations that the U.S. will maintain ultra-low interest rates for an extended period of time.
In terms of U.S. government spending, the Congressional Budget Office (CBO) expects the budget deficit to reach $3.3 trillion in 2020, equivalent to 16% of GDP and the largest since 1945. The Congressional Budget Office projects that the U.S. budget deficit will still be a staggering 8.6 percent of GDP by fiscal year 2021.
So far, the rising deficit has failed to significantly push up long-term U.S. interest rates. This reflects expectations that the U.S. economy and employment will undergo a lengthy recovery and that the Federal Reserve will be willing to continue to expand its balance sheet and purchase more U.S. Treasuries.
Therefore, regardless of who is ultimately elected, as long as the United States economy continues to run a double deficit and the Federal Reserve is willing to continue to maintain an accommodative policy, the dollar will remain under downward pressure.
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