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For financial markets the pandemic has meant unprecedented levels of fiscal and monetary policy support. Real yields have dropped in the US and this has resulted in a weak USD. According to economists at Rabobank, the US dollar is set to remain on the back foot into 2021.

Key quotes

“It is likely that there is a quarter or two of bad economic news to come before the global economy moves into a post pandemic state. This opens up the possibility of pullbacks in the early stages of next year. But, there is a circular element to the outlook. Since investors are anticipating that central banks are ready to use expanding balance sheets to protect them from the downdraught of bad economic news, it seems likely that sell offs could run into good support. This implies that the USD is likely to remain soft against a basket of currencies in the New Year.” 

“Few central banks will welcome an appreciation in their currencies vs the USD. This suggests very generous policy settings from a number of central banks and a hint of a currency war theme.”

“The Fed has encouraged the consensus to expect that it is willing to lean on the yield curve to ensure rates remain low until it is comfortable that it has made further progress towards its targets for maximum employment and price stability. Real interest rates in the US could remain low for a protracted period.”