RIO DE JANEIRO, BRAZIL – The dollar is expected to initiate a decline of up to 20 percent in 2021 should Covid-19 vaccines be widely distributed and help restart global trade and economic growth, according to Citigroup.
“We believe that vaccine distribution will set all of our market downward indications, thereby enabling the dollar to follow a path similar to the one it experienced from early to mid-2000s,” when the currency entered a multi-year downward trajectory, Citigroup strategists such as Calvin Tse said in a report on Monday, November 16th.
The Bloomberg dollar index, which has accumulated a drop of approximately 11 percent over its March peak, came under greater pressure on Monday after news that Moderna’s vaccine against Covid-19 showed efficacy in a clinical trial, which impacted on demand for assets perceived as safe, such as the dollar, the yen and U.S. Treasury bonds.
Strategists have argued for months that the U.S. elections, vaccine breakthroughs and Federal Reserve policy may have a strong impact on the U.S. currency. The elections were ultimately not the catalyst for a significant drop, but Citigroup says the macroeconomic scenario will be a major factor in the dollar’s future performance.
Rotation expectations
The bank expects that, in addition to the impact of vaccine breakthroughs, the dollar will be affected by the Fed’s dovish stance, inclined to monetary slackening, as the global economy normalizes. Moreover, the world economy is expected to grow at a faster pace, and investors tend to exchange U.S. assets for international ones.
And “if the U.S. interest curve slopes with increased inflation prospects, this will encourage investors” to hedge exchange exposure, they said. “Given this scenario, there is potential for dollar losses to be anticipated,” and the currency would spiral earlier.
Citigroup is more pessimistic than strategists who project that the currency will depreciate about three percent before the end of next year. The Bloomberg dollar index has accumulated a drop of 1.8 percent this month and declined in six of the last seven months.
The highest annual drop in the DXY dollar index, the Intercontinental Exchange, occurred in 1985, when it plummeted 18.5 percent.
Citigroup notes that in 2001 the catalyst for the dollar’s downward trend over the years was China’s accession to the World Trade Organization. This “spurred a wave of globalization, pushing up the volumes of global trade, leaving the closed U.S. economy behind which had a much lower beta for global growth”.
“There are many reasons to be optimistic,” the strategists said on vaccine development. Distribution “will catalyze the next step in the structural downturn of the U.S. dollar we are expecting”.
Source: InfoMoney