The U.S. dollar went from a life preserver to a castaway in a topsy-turvy 2020 that many investors believe marks the beginning of a recession for the currency frontier.
US DXY ICE Dollar Index,
the unit’s share was against a basket of six major competitors, down 6.7% for the year, according to FactSet, its first annual decline from a 9.9% decline in 2017. In addition, the index Thursday down to a low of 89.52, the lowest level since April 2018. A fall below 88.25 would bring out the 2018 low.
The fall in the index came after the financial shock created by the COVID-19 pandemic in February and March spurred dollars for DXY-led dollars to a three-year high. Activity was credited by the Fed, injecting liquidity into financial markets and expanding or establishing swap lines with foreign central banks, helping the dollar turn south.
“Just under three months into 2020, the dollar was the strongest major currency in the world, albeit slightly weaker against the Hong Kong dollar,” recalled Kit Juckes, global strategic macro at Société Générale, ann an nota. “From the Fed’s volley on policy actions at the end of March, however, it is weaker against almost everything” except for the notable exceptions of the Turkish lira USDTRY,
and real Brazilian USDBRL,
The weakness of the dollar has been largely welcomed by investors, who see it easing the global financial situation. A weaker dollar is seen as a net positive for U.S. and global equities, including emerging markets.
Read: Here is what the fall of the US dollar means for the stock market
A weaker buck is also seen as a positive for commodities, which looks like rations going back sharply from a pandemic loss in the spring.
See: How a weaker dollar could help fuel commodity increases in 2021
The DXY is putting a lot of pressure on the euro EURUSD,
which fell 0.7% Thursday to $ 1.2216 but rose 8.9% for the year and hit a 33-month high against the dollar. The European Central Bank is among the parties that do not welcome a weaker dollar, as a stronger euro measures import prices and makes it harder to hit a non-inflation target. The bank’s profit is close to just under 2%.
It would take a move with the euro above $ 1.25 to push the DXY through support at 88.00, Brad Bechtel, global head of FX at Jefferies, said in a note.
That seems to be “expected” as 2021 progresses, he said, with the ECB continuing to address the devastating pressures of stronger currencies and the ” persistent virus overgrowth. ”
He does not see the DXY falling well below 88, or the euro climbing much higher than $ 1.25, “but we will know more about that as we progress through Q1 2021.”
Juckes noted that dollar sales stopped in the summer, but that all major movement data was reversed in the late first quarter after the Fed took action.
“Perhaps the big move is the one that has started the way vaccines do it. On that basis, we are riding a wave of vaccine hope, subscribed with discounted money, into the first half of next year, ”he wrote.