The US dollar dropped to a 2 1/2-year low as the prospect of vaccine rollouts added to headwinds for the world’s reserve currency.
The Bloomberg Dollar Spot Index fell as much as 0.2 per cent to an April 2018 low after US officials said vaccinations may start in less than three weeks. The pound and the Norwegian krone led gains against the greenback, while the yield on 10-year US Treasurys rose three basis points to 0.86 per cent. The Australian dollar is also benefiting from the US dollar weakness, rising to around 73 US cents. In March, it was below 58 US cents.
“The vaccine news is favouring the view of a sooner-rather-than-later global economic recovery with the USD losing its safe-haven appeal along the way,” said Rodrigo Catril, a currency strategist at NAB. “This is a risk-positive, USD-negative backdrop, especially with the Fed likely to remain ultra-dovish for some time.”
An inoculation that offers adequate protection against infection could help power a rebound in global growth and add momentum to a rally in equities and other riskier investments. That outlook is undermining the greenback, which tends to benefit in times of heightened uncertainty.
According to Citigroup, the dollar is likely to drop as much as 20 per cent in 2021 should COVID-19 vaccines become widely distributed and help revive global trade and economic growth. Morgan Stanley recommends selling the dollar in favour of stocks and credit, while Goldman Sachs prefers shorting the US currency against developing-nation peers, including the Mexican peso and South African rand.
“We would be reluctant to back away from USD shorts with that important tail wind now in place,” Goldman strategists including Zach Pandl wrote in a note.
“Global economic recoveries can correspond with dollar bear cycles, as safe-haven flows to the US decrease and investment opportunities beyond the US increase,” said Stephen Innes, a strategist at Axi.
The dollar has fallen more than 11 per cent from a record high in March. Meanwhile, the MSCI All Country World Index – a benchmark for global equities – has rallied about 60 per cent from a low in March and was trading near an all-time high on Monday.
The dollar has come under pressure in recent weeks after Joe Biden’s victory in US elections fuelled expectations for reduced geopolitical tensions and more fiscal stimulus. The prospect of an extended period of loose monetary policy from the Federal Reserve is further weighing on the greenback, with real yields firmly in negative territory this year after nominal rates fell and US inflation expectations remained comparatively elevated.
“Low real yields in the US have corresponded to a weakening USD since the pandemic,” said John Velis, a strategist at BNY Mellon. “This is why we think the dollar’s weakening bias will stay intact into 2021.”
Source: Thanks smh.com