When investors are scared, they turn to the U.S. dollar.
As the coronavirus lockdown causes skyrocketing unemployment and heightens prospects of a deep recession, fear has fuelled the greenback toward its highest ever level.
The Federal Reserve has made dramatic moves to protect the U.S. economy.
Although the moves have been widely regarded as warranted, the Fed’s two significant interest rate cuts to near-zero made it less appealing for investors to sell currencies with negative rates, like the euro, in favor of the dollar.
The Fed’s multi-trillion dollar rescue package will also put pressure on the dollar because the budget deficit is expected to triple in 2020–breaking the previous post-World War II record.
Many nations borrow in dollars, but if the greenback strengthens, it makes servicing this debt harder in their domestic currencies.
Even before the coronavirus outbreak, some strategists believed the dollar needed to weaken.
They saw this as essential to jumpstarting the already moribund global economy, which has since worsened under lockdown.
In October, Saxo Bank chief economist Steen Jakobsen told CNBC that a lower dollar was needed to spur global growth:
In a global system of failed monetary policies and a long and difficult path to fiscal policy, there is only one other tool left in the box for the global economy and that is lower the price of global money itself: the U.S. dollar.
There has been more chatter among analysts that global policymakers might have to pull together to weaken the dollar.
Marc Chandler, the chief market strategist at Bannockburn Global Forex, told CNBC that intervention by the G7 could be warranted:
I think that it’s going to prove necessary…. The big dollar rallies we’ve had ended with intervention. The first line of defense is to go to the swap line and let the swap lines work. I think we need another week to see if the increase in swap lines and the lower rates will ease the dislocation.
There’s historical precedence for intervention. The 1985 Plaza Accord saw the U.S. agree to weaken its currency relative to the Japanese Yen and German Deutsche Mark.
Others, however, suggest some countries are already turning away from the dollar, and that this will now continue.
Robin Brooks, the chief economist at IIF, said the U.S. has an “exorbitant privilege” because it can launch massive stimulus packages without hurting the dollar.
But he added, “there’s nothing to say this is how it’ll be forever,” pointing to the 2011 post-crisis low for the currency.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.