These weeks, the US dollar has been the king of the market. It is supported by the demand for safe-haven assets, relied upon because of the global stimulation, and propelled by the difference in income between the USA and Europe. Well, the dollar is strong but how long will this last and what will be with dollar in 2021?
Circumstances are on the dollar’s side
The world has lately been full of noticeable events. Capital markets crawled excessively high and are now easing their overbought tension, sliding down. The currencies of developing countries are being pulled down by the Turkish lira and sales in debt markets because these days market players are not eager to risk. The pound is weak due to the problems with the anti-COVID vaccine and winter statistics. The yen keeps trying to grow but the strong dollar is holding it back. The US statistics is rather confident, even with seasonal corrections (winter was extremely cold) and the pandemic.
The Fed is keeping its policy soft
At the latest March session, the Fed’s comments became somewhat more confident but left the overall framework of its monetary policy without much change. The Fed is not likely to alter the interest rate until 2023 because the economy needs it near zero. Si, market expectations of the preliminary toughening of market conditions get little support. The commitment to leave the policy soft is stressful for the dollar; however, this stress is normal and accounted for in the quotations.
There is also good news. The forecasts of the main economic parameters have been revised and improved. For example, the GDP in 2021 is now expected to grow by 6.5% against 4.2% forecast earlier. Inflation will turn out at 2.4% against 1.8%; unemployment will be decreased by 4.5% in 2021 and by 3.9% in 2022. The average rate of 2021-2023 is expected to be 0.1%; in the longer run, it will amount to 2.5%.
The expectations improved, of course, thanks to the mighty programs of economic support and the confidence of the US government which thinks that this is the only way to restart the economic system after the crisis. Biden’s administration needs bright long-term measures and equally bright results. They will drive attention away from the very mechanisms of making money for stimulation. America needs ambitious goals that will distract citizens from the ways they are being achieved.
Stimulation: what is next?
In February and March, the White House quickly designed a new support program for the US economy. The sum of the support amounts to 1.9 trillion USD and stands in place of those social stimulation measures that expired on March 15th. This is a kind of a positive social blow. A part of the sum is planned to spend on the fight with the coronavirus, while the second half will be allocated to citizens. For example, there are targeted payments of 1.4 thousand USD per taxpayer, which means that, together with the previously approved payment of 600 USD, each American can get 2,000 USD of anti-crisis support. This is wise because the money will get fast into the economy. Another money flow is to go to businesses, enterprises, education, and local budgets.
And this is not it. They are designing a new program for 3 trillion USD meant for fighting against economic inequality and climate change. The plan is to be presented in the nearest future, and it might contain an unpopular measure — a tax increase.
During the pandemic, the US poured into the economy a huge sum of money, and the government seems to be ready to go on. Money is no problem — they will print as much as needed.
The printing machine: an obvious risk
Here is where the dollar faces serious risks. As long as the Fed is not going to alter the interest rate until 2023, keeping it near zero, and the stimulation program is only unwinding, money supply will be inflated. Pouring as much money as possible into the economy seems to be Biden’s main economic strategy. As for the consequences, they will leave them for those who come next.
The bigger the money supply inside the US economy, the longer soft credit and monetary policy will last, the longer the dollar will remain depressed.
The fact that the USA are winning over Europe in terms of fighting with the pandemic and supporting the economy will somewhat smooth out the pressure. The euro looks pale in sick Europe, while the USD seems much healthier.
In fact, if the dollar drops, this will again support the US economy: it is hard to develop when your own currency is strong and aiming high.
Any forecasts contained herein are based on the author’s particular opinion. This analysis may not be treated as trading advice. RoboForex bears no responsibility for trading results based on trading recommendations and reviews contained herein.