The US dollar is likely to weaken further as the market believes that post-election geopolitical risks will decrease and that the next stimulus package will likely be smaller than expected, according to analysts.
Citi Private Bank strategists predicted a weaker dollar as a Biden administration would reduce uncertainty in international trade policy.
“The victory for President-elect Biden means a return to more conventional governance. As the president’s province, this will lead to a major change in foreign policy. Alliance-building will return. The” tariff threat first “negotiating tactic will end,” the chief wrote The bank’s investment officer, David Bailin, and Steven Wieting, chief investment strategist and chief economist, in a note released Monday.
A large part of the world’s financial markets will benefit from this, especially in emerging countries.
“Perhaps the greatest clarity after the elections is for world trade. US foreign policy will enter a more predictable phase without escalating tariff threats. We see a falling US dollar and rising emerging economies as very likely,” they wrote.
On Friday, the US dollar index, which tracks the greenback versus a basket of its peers, hit a low of 92.456 – its lowest level since September 2. After predictions over the weekend that Joe Biden would win the US presidential election, the dollar continued to dip sharply to 92,162 on Monday.
However, Tuesday’s Asian trade was limited to the Pfizer vaccine’s hopes to last at 92.813 – but still below the 94 level seen earlier this month.
“What was probably more of a surprise … after the election results … was the way we not only saw (the Chinese offshore yuan) and Asian currencies benefited from it … but also a much wider sell-off of the Dollars – all G10 currencies, “Adam Margolis of JPMorgan Private Bank told CNBC’s” Street Signs Asia “on Monday. This includes some emerging market currencies in particular, he added.
Asian currencies have rallied for the past few days, with the Chinese offshore yuan hitting a 28-month high on Monday and continuing to rise at 6.61 on Tuesday morning. The Japanese yen hit an eight-month high of 103.18 against the dollar on Friday, according to Reuters.
Margolis, the bank’s head of foreign exchange, commodities and interest rates, pointed out that the Biden win lowers the overall geopolitical risk premium and has “spillover effects” outside of Asia.
He added the issue was to continue looking for “ways” to reduce the dollar’s overweight exposure.
“I think it’s important, this idea, is that the prospect of a little lower fiscal stimulus going forward has resulted in lower returns, at least initially,” he said. “I think that puts the Fed back on track and underscores the need for them to communicate effectively that we are going through a period of sustained negative real interest rates.”
When interest rates fall, it affects the US dollar as investors may flee to US dollar-denominated assets – resulting in lower returns.
Brokerage Phillip Futures said in a note on Monday that the dollar could weaken if the second stimulus package is smaller than expected.
“An increasingly bearish picture is emerging for the US dollar … for signs that Fed money printing could be used in place of government spending to prop up the economy,” it said.
A split Congress – with Republicans in control of the Senate and Democrats in control of the House – can mean a small stimulus package. This puts pressure on the Fed to accelerate its bond purchase program and other economic support measures, and in turn puts pressure on the dollar, Phillip Futures said.