The exchange rate of the main currency pair EUR/USD has risen close to 1.2100 and is at its highest level for more than two years. As a result, the euro, strengthening to the dollar, seems to continue a trend that may have changed in March 2020 after the pandemic hit the financial markets hardest.
We could see the loss of the dollar, among other things, through a drop in futures contracts for the American currency index. At one point the DXY fell to 91.1 points, which is the lowest level since the end of April 2018. There were many factors that could hit the USD yesterday, which might be translated into a strengthening of emerging market currencies, including the zloty. The weakness of the USD could also help the silver or gold prices, which yesterday rose strongly, and today the increases seem to continue.
Investors seem to welcome the proposal, which Republicans and Democrats agree with, regarding the aid package for the US economy. The value of the fiscal package at the moment is 908 bln USD, much less than was proposed even before the elections. However, better less than 1 trillion dollars than further deadlock in the talks.
The aid package also means an increase in US debt, which in turn may have hit the dollar, but could also lead to strong falls in US bond prices. Moreover, the U.S. Federal Reserve is expected to pump more money into the economy, expanding both its bond-buying program and bank lending, in light of weaker-than-expected US economic data.
The U.S. dollar could also be under pressure due to the loss of safe-haven status. This includes the possibility of the first vaccinations on COVID-19 in December. Pfizer's vaccine is expected to be available in the United Kingdom as early as next week, and in the United States, it may come into use in the second half of December.
An increase in the EUR/USD exchange rate above 1.2000 may soon be met with verbal intervention by the European Central Bank. Already at the turn of August and September, when the exchange rate reached 1.2000, statements about the strong euro, its impact on inflation and economic growth in the euro area were made. We may soon find out how much the ECB is tolerant of the exchange rate.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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