The USD is often lauded as the strongest currency in the world. Indeed, even when the coronavirus began to wreak havoc on the global economy, the dollar proved resilient. This was all the more impressive considering how heavily the United States has been affected by Covid-19.
However, there have been some changes with the dollar as of late. The reserve currency has weakened and allowed other instruments to take center stage. The USD/JPY entered a prolonged flat trend that is now turning bearish, while the notoriously weak euro managed to push the EUR/USD to a two-year maximum. In other words, the dollar has entered a period of decline.
The dollar index, which reflects the strength of the USD versus several other major currencies, peaked at 102.08 on March 20 when the coronavirus was making big news in Europe. Throughout April and May it stayed slightly lower, around the 100 level, as the virus spread in North America. But ever since the beginning of July, the dollar index has been dropping steadily. Today it finds itself at 94.70, the lowest level since a sudden drop on March 9, which is also consistently lower than the value the index held in 2019 and most of 2018.
Considering the coronavirus pandemic is still going on and China and the United States are not exactly getting along, one would expect the USD to remain strong due to it being a safety asset. So, why is the dollar retreating?
The short answer to that is the coronavirus. The US has experienced a Covid-19 outbreak like no other country. It has over 4.1 million cases, which is almost one third of the global total, and keeps adding about 70,000 new registrations each day. Close to 25% of all infections have come after President Trump ordered states to cancel their lockdowns (on the grounds that the quarantine was hurting the economy).
Yesterday’s initial jobless claims showed an unpredicted increase. Though not nearly as dramatic as the 20 million jobs lost at the start of the coronavirus outbreak in the US, the unemployment reports paint a grim picture of the country’s ability to recover.
Furthermore, the current stimulus packages are set to expire next week. Unless the government and the President agree on a new plan in the next few days, millions of people might be cut off of their unemployment benefits or the direct payouts the government has been doing these past few months.
Not only is the economy not in a position to begin recovering yet, it will most likely take extra damage in the near future as some states remain in lockdown. More people losing their jobs is also a possibility. Thus, the government and the Federal Reserve will most probably have to loosen their policies further for better support.
In other words, the US economy is no longer invulnerable. The coronavirus has exposed its weaknesses and those are beginning to weigh on the USD.
The only possible reversal for the dollar can come from the US-China issue. If the two countries continue exchanging threats and if they get to a point where their trade war restarts, the dollar’s safe haven qualities will take precedence once more and strengthen it. But until that happens, all the dollar has in store is weakness and decline.
