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.
“Fiscal stimulus in the US, which boosts US growth expectations, is a good development for wider risk appetite,” he says. “It could fuel dollar weakness in concert with the discovery and distribution of the coronavirus vaccine, which is quite literally a shot in the arm for global growth.
“Heightened global growth expectations have fuelled a stronger outlook for growth/risk-oriented currencies against the dollar, despite worsening Covid-19 trends in several major growth centres.”
But stronger growth expectations could also reduce the risk of Fed action and lead to higher yields. Extremely low US yields have been a part of the weaker dollar story, so a move higher in yields could feed back into a stronger dollar.
“Provided the Fed commits to average inflation targeting, this should be negative for the dollar via lower real yields, improving risk appetite,” says Deutsche Bank’s global head of FX research, George Saravelos.
HSBC global research’s head of European FX research, Dominic Bunning, observes that although US 10-year yields have been diverging from the dollar for the last few months, historically that divergence has tended not to last for extended periods, so the degree of the move higher in US yields would be important for the dollar’s longer term outlook.
Circumspection
The latest fall in the dollar follows the decline recorded when approval of the Pfizer-BioNTech coronavirus vaccine was announced.
“With the mantra of the Fed being inflation, the reinflation of the global economy will continue to see capital flow towards riskier assets,” says Mike Krupkin, head of G10 spot trading Americas at Barclays.
Ebrahim Rahbari, chief G10 currency strategist and global head of FX analysis and content at Citi, takes a slightly more circumspect view, suggesting that while the Pfizer-BioNTech vaccine approval was marginally positive for investor risk appetite, it was incrementally less impactful than previous medical headlines.
“Even though price movements have generally been consistent with ‘vaccine optimism’ – as equity prices have risen, the rates curve has steepened, and the dollar sold off – we think that the reflation theme rather than vaccines was the main driver,” he says.
“Indeed, using the baskets of stocks designed by our colleagues in equities as a guide, markets have factored in slightly more virus risk recently on account of large second waves and new restrictions.
“Finally, investor flows have also been mixed (including some profit taking) even though overall sentiment remains optimistic.”
Other impacts
Analysts are also concerned about the impact of coronavirus on employment and consumer prices.
John Velis, FX and macro strategist Americas at BNY Mellon Markets, says the December employment figures, which are due for release on January 8, are expected to be disappointing.
“The November data showed a significant slowdown in jobs growth; initial data for December suggests we might even see negative employment growth for the first time since April,” he warns.
Daingerfield agrees that the risks from upcoming US economic data are on the downside, particularly if there is a widening of lockdowns in growth centres. He thinks the fall in hiring and weak retail sales numbers in November may have been the beginning of a more serious slowdown in economic data.
Bunning expects the weaker dollar trend to continue in 2021 as global financial conditions keep it under pressure, especially against the most ‘risk-on’ currencies such as the AUD, NZD, NOK and SEK.
