The broad USD index ended 2020 on a downbeat note with the greenback continuing to lose ground against virtually all major currencies. Looking ahead to the next few weeks, analysts at the National Bank of Canada expect that imposition of new lockdowns to slow the COVID-19 pandemic will put a floor under the US dollar. As more people get vaccinated and the economy reopens, the slide of the greenback is set to resume, especially against currencies of emerging economies.
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“Early in 2021, the greenback continues to depreciate. The latest bout of softness comes from the unexpected Democrat victory in the January 5 Georgia Senate elections. In our view, Democratic control of all the levers of executive and legislative power makes an additional stimulus package of about $600 billion for states and households very likely. That would come on top of the $900-billion package voted by Congress at the end of last month. If we are right, the Federal Reserve will remain engaged in quantitative easing for the foreseeable future, setting the stage for more USD weakness.”
“Economic downturns can be expected as covid resurgence forces the authorities of many OECD members to shut down large portions of their economies until vaccines are more widely distributed. What’s more, the vaccines will need to prove their efficacy against the new strains of COVID-19 that have recently appeared. We expect this turn of events to put a floor under the USD, a development made even more likely by a need to prune back existing massive speculative positions against the greenback.”
“Until we get more visibility on vaccine distribution and efficacy and on the timing of extra fiscal stimulus, we see a period of consolidation for the US dollar. As more people are vaccinated and the economy reopens, we expect the slide of the greenback to resume.”
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