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Downward outlook for dollar as headwinds greet 2021

Agreement on the long-awaited US coronavirus relief bill has created further downward pressure on the dollar at the start of a year in which analysts expect economic headwinds to devalue the greenback.

Gerd Altmann via Pixabay

US president Donald Trump left it as late as possible to add his signature to the country’s coronavirus relief bill, approving it on December 27 after having threatened to refuse to do so as he sought to increase the size of cheques to be paid out to citizens from $600 to $2,000 – a rare point of agreement between him and Democrat lawmakers and something that Democrats are still seeking to enact via a separate proposal.

The dollar weakened against other major currencies as the prospect of looser fiscal policy and more debt issuance by the US Treasury increased.

Over recent months markets have priced fiscal stimulus prospects as positive for risk assets and negative for the dollar. If the Democrats win both Georgia senate seats in special run-off elections on January 5, this will further increase the odds of additional fiscal spending and weaken the dollar.

According to Brian Daingerfield, head of G10 FX strategy Americas at NatWest Markets, the direction for the dollar as a result of successful stimulus is difficult to assess.

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Brian Daingerfield, NatWest Markets

“Fiscal stimulus in the US, which boosts US growth expectations, is a good development for wider risk appetite,” he says.