As we enter December, the U.S. dollar has fallen to multi-year lows against other currencies. Meanwhile, the euro, the Australian dollar, the Canadian dollar, and the Korean won all hit their highest levels in more than two years this week, while the Swiss franc is at its highest level since 2015. Some analysts have suggested that the dollar may be headed for further weakness as Asset Management Ltd. takes record short positions in the dollar.
Optimism over the U.S. economic stimulus package negotiations, bets on a successful vaccine rollout have driven investor bets on a global economic recovery, and investor demand for the dollar has fallen, leading to dollar weakness. Wall Streeters are warning that the dollar will go through a bearish cycle as the Federal Reserve has kept interest rates low for years.
Christopher Wong, senior foreign exchange strategist at Bank Negara Malaysia, said the smooth rollout of the vaccine could be a game-changer as it could accelerate the economic growth recovery and reinforce the weakness in the dollar.
Pro-cyclical currencies including the Australian dollar, the New Zealand dollar and the South Korean won in Asia (excluding Japan) will benefit, while the U.S. dollar remains at a disadvantage.
According to the Bloomberg Dollar Index, the U.S. dollar has declined against major currencies in seven of the first 11 months of the year. Two other traditional safe-haven currencies, the U.S. dollar fell 8 percent against the Swiss franc and 4 percent against the Japanese yen, underscoring the impact of the Federal Reserve’s unprecedented stimulus measures.
Federal Reserve Chairman Jerome Powell said Wednesday that the Fed will keep interest rates low until the economy “very clearly has weathered” the crisis brought on by the contagion. During the global financial crisis, the U.S. dollar experienced a similar decline when the U.S. central bank adopted quantitative easing.
The following are the key breaks in the currency markets this week.
EURUSD has broken the psychological level of 1.20. On Thursday, the index reached 1.2125, its highest level since April 2018.
On Wednesday, USD/CAD broke below 1.2910, a new low since October 2018.
On Wednesday, the Australian dollar rose to 0.7437 against the U.S. dollar, a new high in more than two years.
The Swiss franc soared to its highest level since January 2015.
The risk-sensitive won rose to 1,096.85 against the dollar, its highest level since June 2018, after the won breached the key 1,100 level against the dollar.
Credit Suisse forecasts that the euro could rise to 1.25 against the dollar by the end of 2021, while Goldman Sachs tends to short the dollar against the yuan and expects the euro and yen to strengthen further. JPMorgan Chase and Citigroup also predicted dollar weakness.
Terence Wu, FX strategist at OCBC Bank Singapore, stated.
“Risk appetite appears to have strengthened again this week, which we believe will accelerate the dollar’s recent downward trend. While we expect a round of downside against Asian market currencies as well, this round of dollar weakness is still concentrated in the USD/G10 currency.”
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