The Dollar Will Keep Falling, UBS Predicts

The buck can’t get a break. The US dollar, strong for so long, has been dropping since late March. And that’s going to continue “over coming months,” according to UBS.

To blame are better tidings on the coronavirus front prompting less safety seeking in US Treasuries, lower US short-term rates, and American political turmoil, according to Mark Haefele, CIO for global wealth management at the Swiss bank, in a research note.

In the beginning, with the market’s February-March panic over COVID-19, the dollar’s position became greater, as overseas money flocked to US-denominated Treasury bonds and other refuge instruments in America. In fact, over the past three years, amid the strains of the US-China trade war and Brexit, the dollar is up 10%.

After the massive Washington rescue package was announced in March, though, the greenback weakened. Against a basket of its six major trading partners’ currencies, called the US Dollar Index, the dollar has dropped since its March 19 peak by 4%. UBS expects dollar weakness to be worst against the British pound (the buck is down 8% versus sterling since the apex) and the Swiss franc (off 4%).

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First, UBS’s Haefele and his team wrote, “Safe haven flows into the US currency are ebbing.” Reason: the market’s belief that the pandemic is fading. (Except for last Thursday, amid news of increased caseloads in several states that had opened up.)

Second, the Federal Reserve’s aggressive monetary easing. The research note pointed out that at the beginning of 2020, the two-year Treasury yielded 2.15 percentage points more than the equivalent German bond.

Now, the premium is just 0.81 points. The gap is similar for other nations in the G10. So foreign investors get less bang for the buck these days. At the same time, the Fed’s balance sheet has expanded $3 trillion since the pandemic took hold, twice the growth for the European Central Bank.

Third, there’s the political factor. At the moment, Democratic presidential nominee Joe Biden has a solid lead over President Donald Trump. “The resulting political uncertainty,” Haefele wrote, “specifically in relation to regulations and taxes, is also likely to weigh on the US currency.”

Biden has pledged to reverse Republican Trump’s rollback of regulations on safety, environmental, and financial issues, as well as to raise taxes on wealthy people and corporations—levies that have dropped during the Trump administration.

UBS has projected that an American economic recovery will start in the third quarter and US social activity will return to normal in 2021’s first half. But it does acknowledge that a major second wave of the virus could mess up the scenario significantly. Then, amid renewed lockdowns, the nation’s economy wouldn’t be back until next year’s second half.