Why the Fed may be forced to hit the brakes on US dollar slide
- China and Europe’s patience with renminbi and euro appreciation, respectively, may not last, while incoming Biden team could be less opposed to stronger dollar
- The Fed’s response will be key, as pressure builds on it to keep the economy from overheating with fiscal policy so loose and interest rates so low
There is a saying in currency markets that it’s never wise to stand in the way of an express train, especially when it’s speeding downhill. The US dollar seems on a hiding to nothing after losing 11 per cent of its trade-weighted value over the past nine months.
It’s a big boost for the US economy as the dollar’s fall is the monetary equivalent of around 2.5-3 per cent knocked off short-term interest rates, sparing the Federal Reserve from more easing measures for the time being.
Shorting the deflated dollar may look like a sure-fire bet for investors right now, but maybe not for too much longer. One of the biggest reasons for weak dollar perceptions, US President Donald Trump, will soon be leaving office and dollar bears should be on their guard about President-elect Joe Biden’s future currency intentions.
The runaway dollar train could be about to hit the buffers, especially if China and Europe begin to challenge the weaker dollar’s threat to their own economic well-being.
Biden might spark dollar deliverance sooner than markets expect. As a general rule, past Republican administrations have tended to pursue weaker dollar policies, while Democrat presidents have embraced currency stability or even openly promoted stronger dollar views.