- COVID-19 Vaccine and the USD
- Forecasts and Analysis
- Will there be USD’s Sharp Fall in 2021
COVID-19 Vaccine and the USD
Markets are torn between the positive reports about the COVID-19 vaccine on the one side, and the resurging lockdowns and infections on the other side.
Traders naturally want to know where that leaves the US dollar.
Recently, Pfizer and Moderna have announced that their vaccines are 90% and 95% effective.
Although there’s still great uncertainty around the coronavirus treatment, it’s possible to predict that positive news will keep coming.
The USD is a safe haven.
As a result, the baseline scenario is that the commercial distribution of vaccines and the ongoing monetary easing in 2021 may weaken it.
According to some analysts, the US currency may depreciate by as much as 20% in 2021.
The tide is high in the markets these days, as, on one hand, the ongoing fear of the second wave of the pandemic and the resurgence of infections is pulling everyone deep down.
On the other hand, hopes about the production of the first shares of COVID-19 vaccines in the coming months keep pushing investors and risk assets up to the sky.
Of course, the dollar was one of the big players in this game.
But why not travel to the future to see what analysts and major banks expect will happen to the US dollar in 2021 as the vaccine begins to be widely distributed.
What are the reasons behind their expectations of the dollar’s decline?
Forecasts and Analysis
Wall Street analysts expect that the arrival of the (COVID-19) vaccine for everyone will lead to a sharp decline in the US dollar in 2021 as confidence returns to the global economy.
Major banks that already have negative views about the dollar for 2021 have lowered their forecasts further this month after final trials of several vaccines proved they would be widely and commercially available next year.
That will lead to economic recovery, encouraging investors to abandon safe-haven assets such as gold, the dollar, and the yen and seek riskier assets.
“Vaccine distribution we believe will check off all of our bear market signposts, allowing the dollar”, Citi said in a research note.
“Can the dollar decline 20 percent next year alone? We think yes,” the bank added.
“Given this set-up, there is the potential for the dollar’s losses to be front-loaded, with the USD potentially falling by as much as 20% in 2021”
2. Bloomberg Consensus
According to the consensus forecasts compiled by Bloomberg, investors expect the dollar index to decline by 3% from its current level by the end of 2021.
There would be significant moves in the currency market too.
The euro could jump to $1.21, during that period, from the current $1.18.
3. Goldman Sachs
According to Goldman Sachs, buying into US markets has been “almost unavoidable” over the past decade.
Corporate profits have boomed, the investment environment has grown, and the Federal Reserve has raised interest rates while other central banks have remained close to zero.
That made the greenback more expensive, making it vulnerable to sharp declines in the future.
The bank expects the dollar to fall by 6% over the next 12 months.
Bank analysts said: “Even if the US economy performs quite well, we think the dollar can weaken substantially as investors look for higher returns outside of the US and exit the safe havens that they have been in throughout the Covid period.”
4. Morgan Stanley
Morgan Stanley strategists expect the dollar index to fall by 4%, with the Australian dollar, the New Zealand dollar, the Norwegian dollar, and the Swedish currency outperforming as soon as the vaccine becomes widely distributed.
Emerging market currencies such as the Brazilian real, the South African rand, and the Russian ruble also have room to rise against the USD.
The bank expects the euro to trade at $1.25 by the end of 2021.
Will there be USD’s Sharp Fall in 2021
- Distributing vaccines widely to all groups would accelerate the recovery of the global economy as people begin to return to normal life and spending. They will abandon fear and their tight hold on dollars or other safe assets to maintain the value of their money. People used to worry about not receiving salaries next month and for how long their savings will cover their expenses during lockdowns.
- The Fed’s dovish policies and the massive stimulus to boost the US economy will continue, fighting the coronavirus consequences even if the global economy returns to normal.
- The Fed also said that it would keep rates low even if inflation expectations rise, which could lead to a sharp steepen in the US bond yield curve.
- The rest of the world is likely to grow at a faster rate as investors move away from the US assets and towards risky ones in emerging markets and other major countries.
The dollar index fell against a basket of six major currencies by more than 4% since the beginning of 2020.
The euro has risen about 6% against the USD since January, while the Australian dollar has surged by more than 4%.
But the dollar index’s decline this year is modest compared to its gains in previous years: it jumped by nearly 13% in 2014 and 9% in 2015.
However, some strategists are concerned about the resurgence of coronavirus cases around the world, the economic damage from renewed lockdown measures, and the hard blow of the second wave.
They indicated that a fiscal stimulus package, too small or too late, from US policymakers might steal the shine from risky assets and support demand for safe-haven assets, including the US dollar.
Markets have to respect the present instead of just looking ahead to the future at some point.