Deltec's Think About This - '$ Down... But Not Out | Page 3

Think About This
INVESTMENT RESEARCH
PERFORMANCE OF THE DOLLAR INDEX BASKET AND USD VS EUR YTD
108
106
104
102
100
98
96
94
92
Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20
Dollar Index
USD/EUR
PERFORMANCE OF NON-FIAT CURRENCIES AND NASDAQ COMPOSITE YTD
180
160
140
120
100
80
60
Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20
Bitcoin
Gold
Nasdaq
The most obvious catalyst for the recent decline in
the Dollar is the universal slashing of interest rates
as the pandemic took hold. The US had one of the
highest developed market interest rates prior to
the crisis, so the Fed had relatively more room to
cut. As rates everywhere fell to zero (or below),
interest rate differentials versus the Dollar
tightened. The yield pickup advantage of holding
USD assets diminished, as did the imperative to
buy and own Dollars.
At the same time there was overt policy action
preventing further Dollar strength as we go
through the crisis. Fearing that the pandemic was
causing a shortness of Dollars and in effect a
global credit crunch, the Fed extended Dollar
swap lines to regional Central Banks, ending the
scramble for dollars.
In recent weeks, the primary driver of Dollar
underperformance has been the US’s poor
handling of the coronavirus. The hesitation and
missteps have muted consumer confidence and
recovery spending has stalled. Relative to the
small local outbreaks of China, the rest of Asia
and mainland Europe, the US is still seeing tens
of thousands of new hospitalizations daily. Better
relative prospects for growth are drawing capital
out of US markets, helping European and Asian
markets, which are cheap on a relative basis
anyway.
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