Saxo Bank considered that the weakening stage of the US dollar is a major factor in promoting the recovery in global commodity prices through monetary or financial policies, and supporting economic recovery in the various countries of the Gulf Cooperation Council.
John Hardy, head of Forex strategy at Saxo Bank, said in an online briefing that the US Federal Reserve has promised to continue quantitative easing at the current pace, which suggests that low US interest rates will continue for a long time; However, he cautioned that the market may experience some disturbances in the short to medium term.
The US dollar fell sharply due to the broad and rapid measures taken by the Federal Reserve to confront the Covid-19 pandemic. Currently, questions revolve around the possibility of a continued weakening of the dollar for a period in which global commodities recover through monetary or financial policies, or whether the Federal Reserve risks only forming new asset bubbles through its policy mix;
John Hardy said: "The trends of the US dollar are a major factor for financial markets around the world, especially oil and the countries of the Gulf Cooperation Council, where the US dollar is a clear weight in the region.
The weakening of the dollar appears to be a necessary condition to support the recovery of the region, which will ultimately be achieved, even if it takes some time, and until then, the market may experience some major turmoil before we are assured of our arrival in the safe bank of the Covid 19 crisis.
The economic effects of the pandemic and the decline in oil prices did not exclude any of the economies of the Gulf Cooperation Council states, and these countries are facing one of the biggest economic challenges in its history.
The International Finance Institute recently indicated in a report that non-oil gross domestic product will suffer a contraction of 3.8% during 2020 due to measures to contain the virus, falling oil prices and low public spending, which will make any recovery in commodity prices a beneficial element for the region.
Last week’s Federal Open Market Committee meeting appeared very cautious about long-term interest rates. Another question mark remains about whether the extremely low interest rate policy is causing misallocation of capital.
Hardy added: "The risk here is that this recent rally is merely a side effect of the liquidity pumped by the Federal Reserve and does not address underlying solvency issues, and the possibility of us returning to asset sales and liquidations followed by market turmoil for a long time before we get to the safe side of the Covid Crisis - 19 and its consequences.
Central banks are likely to prevent any new and significant deteriorations, but we do not expect the recent rise in financial assets to continue in the future. "