Pandemic price: what is the reason for the record weakening of the US dollar in two years

On Wednesday, July 29, the US dollar rate against major currencies renewed a two-year low. The corresponding DXY index dropped to 93.4 points for the first time since June 2018. This is evidenced by the data of trading on the international exchange ICE.

Analysts interviewed by RT attribute the global weakening of the dollar to the negative consequences of the coronavirus pandemic. According to Johns Hopkin University, today the United States remains the leader in the number of infected with COVID-19: for all the time, experts have identified more than 4.3 million cases of infection in the country.

Against the backdrop of the spread of the disease, the United States authorities are discussing the possibility of introducing new quarantine restrictions, which could significantly increase the burden on the American budget. Artyom Deev, head of the analytical department of AMarkets, spoke about this in a conversation with RT.

Since the beginning of the pandemic, the US government has already allocated $ 3 trillion to support the economy. Meanwhile, the corresponding amount may increase at least twofold, which will become the largest aid program in the history of the country, Deyev said.

“The next large-scale package of anti-crisis measures alarms investors, as they understand that cash injections will create an additional burden on the dollar. At the same time, the players are not sure that flooding the economy with money will contribute to its rapid recovery, ”the expert explained.

According to the US National Bureau of Economic Research, in February 2020, the country officially began a recession. Thus, the longest period of growth in the history of the US economy, which lasted ten and a half years, ended.

According to the Bureau of Economic Analysis of the US Department of Commerce, in the first quarter of 2020, the country's GDP contracted by 5% in annual terms. At the same time, in the second quarter, the indicator fell by about 34.3%. The corresponding calculations were made by specialists from the Federal Reserve Bank of Atlanta.

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In addition, experts explain the record decline in the dollar's price by the actions of the US Federal Reserve System. Since the beginning of 2020, to support the economy, the Fed has cut its interest rate from 1.5-1.7% to 0-0.25% per annum. Traditionally, such a policy leads to cheaper loans, and also stimulates business and consumer activity.

At the same time, the rate cut makes investments in US government securities less profitable. Vadim Iosub, a senior analyst at the Alpari Eurasia information and analytical center, spoke about this in a conversation with RT. According to the US Treasury Department, over the past year, the yield on US government securities with a ten-year maturity fell from 2 to 0.57% per annum. As a result, investors began to withdraw money from the country's debt bonds and thereby put pressure on the dollar, Iosub said.

“Often, investors bought up dollars in order to then spend them on the purchase of government bonds. However, now the holders of debt securities actually do not earn anything, but only act as sponsors for the American economy, so the demand for US dollars is falling, "the analyst explained.

Moreover, investor confidence in the dollar is declining against the backdrop of yet another aggravation of relations between Washington and Beijing. This point of view in a conversation with RT was expressed by the investment strategist of BCS Premier Alexander Bakhtin.

Earlier, US President Donald Trump accused China of the global spread of COVID-19 and said that he was not interested in continuing trade negotiations with the Asian republic. At the same time, US Secretary of State Mike Pompeo announced the collapse of the system of interaction between the PRC and the United States, after which the parties exchanged demands for the closure of diplomatic missions.

“The new round of tensions was negatively received by investors. Coupled with the unstable epidemiological situation in the United States and the slow pace of economic recovery, the profitability of players from investments in US securities is falling. Not wanting to lose profits, they transfer funds to gold and other precious metals, as well as to the assets of developing countries, ”Bakhtin said.

Support factors

According to Artem Deev, in the current environment, the dollar rate against major currencies may continue to decline in the near future. At the same time, the current state of affairs can have a positive effect on the dynamics of the ruble, the expert said.

“In addition, a low debt burden and rather attractive interest rates in Russia are now playing in favor of the ruble. As a result, most likely, the dollar can be purchased for 71.5-72 rubles by the end of the summer, "Deev added.

In the long term, the dollar exchange rate against the ruble will also depend on the dynamics of oil prices. Alexander Osin, an analyst of the trading operations department in the Russian stock market at IC Freedom Finance, spoke about this in an interview with RT. According to him, as a result of the OPEC + agreement, by the end of the year, the price of Brent oil may rise from the current $ 44 to $ 55 per barrel.

“The dollar continues to be under pressure from the OPEC + agreement to cut oil production. Cartel members have already reduced production by 6-10%, which has significantly increased the price of raw materials. At the same time, the high cost of energy resources in the absence of significant sanctions risks sets a long-term trend for the strengthening of the ruble, ”the expert concluded.