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06.10.202010:40 Forex Analysis & Reviews: EUR/USD: US dollar remains intriguing

Long-term review

Exchange Rates 06.10.2020 analysis

The market is confused not only with the volatility of the US currency, but also with the difficulty of forecasting its further dynamics. Experts disagree about its possible rise or the next collapse, but most are inclined to the latter option.

Economists have repeatedly warned that the dollar's era is nearing its end, and while the USD remains strong, its impact on the global economy is now limited. At the same time, no one intends to push the dollar away, but we should also not count on it as a full-fledged protective asset either.

On the other hand, Stephen Roach, Ex-Chairman of the Morgan Stanley Asia and a lecturer at Yale University, said that the dollar's upcoming collapse is supported by an increase in the current account deficit and a decline in savings on domestic deposits. These problems in the US economy began even before the COVID-19 pandemic, it was just being worsened. The pandemic has become a kind of test for budget holes and dwindling domestic savings including household funds, most American companies and state-owned enterprises.

The second quarter of this year was the most difficult for the United States economy: the volume of domestic savings was in the "red" zone and amounted to -1.2%. The last time it went like this was during the 2008 global financial crisis. S. Roach also emphasizes that the current account deficit is also in danger. Therefore, in order to maintain economic growth, the United States had to borrow from other countries once again. As a result, the current account deficit turned out to be extremely "inflated" and reached -3.5% of GDP. It increased the pressure on the budget deficit, which had been accumulating for years, and became a disadvantage for the US economy.

Based on the calculations of the US Congressional Budget Office, the Federal budget deficit will remain within 16% in 2020, and it will decline to 8.6% in 2021. If Congress adopts the next stimulus package, experts expect the budget deficit to further rise. However, they fear that in the course of these manipulations, the US economy will be tightened by the cycle of savings and deficits, which can lead to problematic consequences if trapped.

According to S. Roach, the USD has come to the point of no return. He is sure that it will not be able to regain its former power in the medium and long-term planning ranges. In addition, he draws attention to the exceptional overvaluation of the dollar, as well as the activation of competitors in a number of key currencies. First of all, the euro belongs to such worthy rivals. This is especially noticeable in the EUR/USD pair, where the Euro currency tends to push the US currency. At the beginning of this week, the Euro weakened slightly, but now it is trying to catch up. Today, the indicated pair is trading near the range of 1.1789-1.1790, recovering yesterday's losses. Thus, experts expect it to return to the resistance level of 1.1900.

Experts said that the start of a new cycle of dollar's weakening is currently being witnessed, which will last for several years. In the current reality, they recommend selling the USD during periods of its strengthening since by early next year, traders and investors expect the most popular currency to collapse by 35%. Analysts said that this process is irreversible, and we can only hope that it will pass without deafening falls in the USD and sharp reversals in its dynamics.

Larisa Kolesnikova,
Analytical expert of InstaSpot
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