Dollar Decline!

A four percent loss in value back in July was the most significant drop the Dollar has had since 2010, this decline is due to a series of factors. In simple words, we can say, the Dollar is not being demanded as much by investors and businesses, who are now looking for alternatives.

USD to EUR exchange rate 2020

Source: tradingeconomics.com

Back in March, when the pandemic had its epicenter in Europe, investors looked for safety in the Dollar, generating an all-time high peak in the exchange rate against the Euro. But with the Coronavirus now spreading extremely fast in the US, and the ineffective measures taken by the US government, have caused the Dollar to plummet (Konotey & Barton, 2020). Add to this recipe the Recovery of Europe and the Euro, and the result is a drop of 10 percent in value of the Dollar in a period of four months.

American economy suffered its worst contraction since the 1940s’ in three months through June, while Europe, although still affected, suffered a softer decrease, and it is already bouncing back. 

For some investors, it is time to react to the influence of the virus in their investment strategy. Paresh Upadhyaya, money manager at Amundi Pioneer Asset Management, says accounting for the virus has taken a more prominent role in shaping his view on the Dollar and the economy. Upadhyaya keeps a spreadsheet of data points, tracking activity from small business, airport traffic, as well as more traditional data on manufacturing and traffic activity. (Konotey & Barton, 2020)

“As cases in the US have picked up, that’s a flag for the dollar,” Upadhyaya said. “Because currency is the perfect reflection of relative value, we use that to gauge which region has a better handle over the virus.”

Not the end

With The Nation’s inability to control the spread of the virus, it is expected that Europe will outperform the US for what is left of the year, although their point is not the end of the Dollar as we know it. 

After the US Federal Reserve started flooding the economy with cash as part of the virus relief plan, creating devaluation, many turned to negative thoughts about the future of the currency. The not so bad news is that this seems to be part of a cyclical process, and the currency will probably revalue after some time. 

Usually, for the working class, a devaluation means tragedy, inflation follows, making imported products more expensive and diluting their savings. According to Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman, we shouldn’t worry too much about inflation during this period, since it is an out of the ordinary situation, and he believes importers will be forced to absorb the inflation.

Money Printer go Brrrr

The fall of the Dollar in the foreign exchange markets, and the surge of bitcoin, seem to have proved the point Bitcoin enthusiasts have sustained for quite some time. “The Dollar will lose its crown as the king currency”, since the pandemic showed the apparent growing lack of trust in fiat currencies and the injection of cash to the US economy. Even creating an internet meme, making fun of the reactions and critics to the expansion of money supply by the governments “Letting the money printer go Brrrr” (Morris, 2020)

The problem is that foreign exchange supply and demand logic is a little more complex than that of domestic consumer prices, considering not only monetary supply but also a broader sign of economic strength and leadership. For this same reason the US Dollar was seen as a safe option during March when it appreciated compared to the Euro when Europe was the epicenter of the pandemic, and now it is the US economy and currency taking the blow.




Image : Gerd Altmann 

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Konotey-Ahulu O. & Barton S. 2020. Dollar sends sign that the US is losing its grip on the virus. Bloomberg: https://www.bloomberg.com/news/articles/2020-08-03/dollar-s-10-slide-is-a-warning-that-u-s-has-lost-grip-on-virus

Landsman S. 2020. “Stars are aligning the dollar” top currency strategist warns. CNBC: https://www.cnbc.com/2020/08/06/stars-are-aligned-against-the-dollar-currency-expert-win-thin-warns.html

Morris D. 2020. Is this the currency collapse Bitcoiners warned about? Fortune: https://fortune.com/2020/08/05/is-this-the-currency-collapse-bitcoiners-warned-about/

The Economist. 2020. Dollar Dominance is as secure as American global leadership. The Economist: https://www.economist.com/finance-and-economics/2020/08/08/dollar-dominance-is-as-secure-as-american-global-leadership

Turner C. 2020. FX: Dollar king loses its crown. ING: https://think.ing.com/articles/monthly-dollar-decline-gains-momentum/


Young J. 2020. Bitcoin hater Peter Schiff says Dollar approaching “Wile E. Coyote Moment”. CoinTelegraph:https://cointelegraph.com/news/bitcoin-hater-peter-schiff-says-dollar-approaching-wile-e-coyote-moment