On 3 November the USA will elect its president for the next four years. When Democrats and Republicans officially nominate their candidates – Joe Biden and Donald Trump – by the end of August, the election will go into the critical phase. The current holder of the office, though, is already exploiting practically every opportunity to launch fierce attacks on his opponent. At the same time, Donald Trump, who lags behind in the polls, is constantly casting doubt on postal voting. Some states see this as a way of ensuring that votes can be cast despite the coronavirus pandemic. Trump, on the other hand, is warning against the apparent opportunity for fraud. On Twitter at the end of July he even raised the possibility of postponing the ballot. Although the president did row back later, less than three months before the date of the election the USA, hit hard by the coronavirus pandemic, seems more on edge than it has been for a long time.
The rumblings in American politics have doubtless contributed at least in part to the tremors that have recently shaken the currency markets. At the centre has been the US dollar index. This barometer tracks the movement of the greenback relative to the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krone and the Swiss franc. Against these six main counterparts the US currency lost 4.8% of its value in July (see chart). That meant the index recorded its biggest monthly drop for almost a decade. The increasing weakness of the greenback is also a reflection of the dismal state of the world's largest economy. The US government reported a collapse of almost a third in gross domestic product for the second quarter of 2020. By comparison, the eurozone has come through the acute phase of the corona crisis relatively unscathed, with economic output in the currency union dropping by "only" 12% in the second quarter. It is common knowledge that the USA is taking a pragmatic approach, pulling out all the stops in monetary policy to combat the historic recession. The government's economic stimulus packages are resulting in treasuries being issued on a grand scale.
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US government debt is consequently rising ever higher. According to Statista it reached just under USDtn 26.5 in June, which means that the country had seen its outstanding obligations increase by a fifth within the space of a year (see graph). Nor can the dollar expect any support from the central bank for the time being – quite the contrary: "The primary reason for the dollar's weakness, in our view, is the ongoing reversal of US monetary policy," write the currency experts of Commerzbank in a comment. Even before the corona crisis, the Fed had indicated that it did not want to raise interest rates again until inflation had reached its 2% target. Previously the Federal Open Market Committee had been prepared to tighten the purse strings as soon as inflation approached that level. When the monetary watchdog announced its new strategy, they had already increased the base rate to a range of 1.50% to 1.75%. Investors, according to Commerzbank, were to some extent therefore able to live with the central bank's change of course. "Now, though, we are talking about them leaving interest rates close to zero for the foreseeable future," the experts write, referring to the Federal Funds Rate, since cut to 0.00% to 0.25%. That, in their view, makes US monetary policy now little different from that of other major central banks, notably the ECB.
The majority of FX strategists do not expect an end to the dollar's weakness any time soon. This was indicated by a recent Reuters survey, with more than half of the 62 respondents anticipating that the greenback will lag behind the other key currencies for another six months at least. According to the news agency, 24 strategists reckon that the downward trend could even continue for more than a year. "There is no doubt that the dollar has now executed a cyclical turn," Kit Juckes, Head of FX Strategy at Société Générale, told Reuters. This outlook has consequences for equity investors as well, as the tumbling dollar could add further fuel to the rally on Wall Street. Goldman Sachs draws a direct link between the currency and the S&P 500: in months with a strong dollar devaluation, the leading US index has appreciated by 2.6% on average since the 1980s. By contrast, the median performance of the benchmark in months with a strong rise in the dollar is only 0.7%.
