It has been another volatile week through to the beginning of May- on my last article on www.thecurrencyblog.com I mentioned GBPUSD being a buy at 1.23- and we saw this play out as we saw GBPUSD hit 1.26 yesterday afternoon before dropping back to 1.25 today- I am watching the Dollar closely as it has been unnaturally strong through this pandemic for many reasons- but on a macro view, I do see many reasons for it to be weaker- at this point I am not sure when we see this happen, but if you are dealing with the US Dollar or Dollar pegged currencies, this could be interesting to keep in mind for yourself and your clients.
So here are my reasons why we could begin to see a weaker Dollar over time;
1. The US is currently on track to be by far the worst performer of handling the COVID virus, with the death rate not curtailing as it is in Europe and the UK it is likely the economy there takes a larger hit than the respective others. Economists also feel the chance of a 2nd wave in the US due to Trump opening up business too early has realistic potential.
2. The USD is known as a safe haven currency, this means it is purchased when investors are concerned about the global market. It has this status alongside a few other currencies but it is a standout. Some economists are suggesting that the COVID outbreak severity in the US may turn investors to offload USD as the safe haven choice and put their funds into other currencies or Gold.
3. Brexit talks have resumed in the last few days, It is widely known that Boris Johnson is keen to ensure this continues on the same path as it was left. However, the deadline for an extension to these talks is the end of June, only 2 months away. Most will agree the impact of COVID will likely be with us during this time and the focus of both parties will be on solving the pandemic. If this moves both parties to agree on extending (not risking a No-Deal Scenario) the GBP would likely strengthen significantly as this impending risk is kicked into the future. Any previous suggestions of this occurring has seen GBP appreciate.
4. Most of the world’s foreign debt is denominated in USD, with the current economic climate requiring more debt to be taken on, a weakening of the USD would make it more feasible for repayments across the globe. This has been an issue with the USD being so strong in recent months and some alleviation here would be seen as a big plus. It is also Donald Trump’s view that a weaker USD would lead to more imports when the market comes back, he has been vocal on wanting a weaker USD.
5. President Trump yesterday stated the trade deal with China is now on the backburner – for those of you who watch the market this heavily affected the Dollar price last year, and more volatility about this will weaken the Dollar and put strength into precious metals as a hedge- generally we see lower prices in Gold and Silver in May as the saying goes “Sell in May and go away” which we have seen already today, but if the Dollar weakens, Gold and silver may catch a bid.