The dollar bear trend has only just begun - ING

The dollar bear trend has only just begun - ING

Chris Turner, ING's Global Head of Markets and Regional Head of Research for UK & CEE, notes that US fiscal policy paralysis and a change in monetary policy strategy from the Federal Reserve make the case for the dollar bear trend extending well into next year. On this background, they revise up their end 2021 EUR/USD forecast to 1.25.

"If real interest rates are one of the best gauges of monetary policy settings then US monetary conditions are now the loosest they have been since 2012. These loose conditions have led to accusations that the dollar is being deliberately ‘de-based’. That term seems a little too pejorative, but what is clear is that the Fed has its foot firmly on the reflationary accelerator and a weaker dollar is part of the preferred monetary policy mix at this early stage in the recovery cycle."

"Arguably, the DXY should have traded weaker into 2012/2013 on the back of the decline in US real yields. Yet that period marked the height of eurozone debt tensions. What is different now is a period of relative calm in European politics – presenting an opportunity for the EUR/USD rally to extend into 2021 as the Fed keeps rates lower for longer."

"Equally, the trend towards more negative US yields has typically created a positive environment for portfolio flows into emerging markets. This year’s exodus of capital from EM has been far more aggressive than that seen during the 08/09 financial crisis. And if global policymakers can keep ‘V’-shaped hopes alive and second wave fears in check, we expect that the return of capital into EM will be a story that runs deep into 2021 – adding to the benign downtrend in the dollar."

"For the above reasons, we see the dollar downtrend extending through 2021 and raise our end year 2021 EUR/USD forecast to 1.25 from 1.10 previously."