Key Takeaways

  • The US dollar’s reign as the strongest currency in the world is being challenged.
  • The European Union’s €750 billion recovery fund may be a game changer for Europe.
  • Investors are starting to consider the market impact of a Biden White House.

In July, the US dollar suffered its worst monthly decline in a decade.1 Europe’s greater success in containing the coronavirus fueled strong gains in the euro, the UK pound and the Scandinavian currencies. Equity markets continued to rally as investors showed confidence that central banks and governments would continue taking action to prevent any breakdowns in capital markets. The Fed’s “lower for longer” monetary stance led Treasury yields to fall to all-time lows.

What happened?

Dollar weakened. A country’s ability to contain Covid-19 has become a key factor in determining the value of its currency. Investors view the US’ inability to control the disease as a failure. As the widening pandemic undermines domestic consumption and prolongs economic malaise, the dollar is being dumped as demand for the euro and other European currencies increases. Analysts predict that over the next 12 months European economies will grow faster than our own, even further undermining the dollar.2

Central banks intervened and investors adopted a risk-on posture. Major central banks and governments around the world provided enormous liquidity and support to stabilize financial markets. Investors embraced these interventions and with an enhanced risk-on sentiment went on a shopping spree for “risky” assets. For the third month in a row, demand has soared for equities, commodities (especially gold and silver), and foreign currencies.3

European Summit showed impressive cohesiveness. On July 21, European leaders agreed on an unparalleled €1.82 trillion budget and Covid-19 recovery package. In addition, after 90 hours of sometimes bitter negotiations, the seven-year EU budget and €750 billion recovery fund were finalized.4 Experts expect the European Parliament to quickly approve the package. The big takeaway: greater political and economic stability, and a new breed of pan-European triple-A bonds, should boost the euro’s appeal among global investors and central banks seeking alternative reserves.

Fed extended swap lines. On July 29, the Federal Reserve left interest rates unchanged as expected. It did, however, act on something important to FX markets: US dollar liquidity swap lines to foreign central banks, set to expire in September, were extended until March of 2021.5 These swap lines are meant to provide US dollar liquidity in times of severe market instability when demand for safe haven dollars soars and dollar shortages tend to arise. By extending swap lines, the Fed effectively mutes future dollar gains in times of market stress. Our long-term view for the dollar remains bearish.

What's in play.

Post-Brexit EU-UK trade negotiations stand still. Deadlocked EU-UK talks have led to increased fears of a “no-deal” Brexit. With only a few months before the Brexit transition period ends (on December 31st), the UK government has been warning businesses to prepare for the UK to default to basic World Trade Organization rules, which would subject most UK goods to tariffs.6 Surprisingly, the UK pound has benefited considerably from the weak and increasingly unpopular US dollar.

US-China trade war impacting tech supply chains. There is ample evidence that the US-China trade war is pushing tech firms – mostly in the semiconductor and communications sectors – to shift their supply chains away from China. Pressure from the Trump administration to keep Chinese firms out of the US digital infrastructure is benefiting the US, as well as Mexico, Taiwan, and Vietnam.7

Large currency speculators shorting the dollar. According to data from the Commodity Futures Trading Commission (CFTC), large currency speculators (“non-commercials”) in the futures and futures options markets have accumulated the largest net short US dollar positions since early 2018. (Net long positions in the euro also stand as the largest since 2018).8 The put-call skew in the currency options market suggests hedge funds are turning more dollar negative.9

What's next.

Long-term dollar uptrend threatened. The US Dollar Index (DXY) broke below its pandemic low in March and breached a six-year-old uptrend line—both bearish signals.10 In addition, market technicians point to the occurrence of a bearish “Golden Cross” pattern, which occurs when the DXY’s 50-day moving average crosses below its 200-day moving average, as a strong indication that the dollar has reversed its long-term uptrend, and begun a new downtrend that may last for years.

Investors imagine a Biden White House. As betting odds for Biden winning the presidential election soar, investors have started to consider the potential market impact of a Biden presidency. Biden has already indicated he will raise the corporate tax rate to 28%.11 Such a move could lure investors to favor foreign over US equities. Regarding the tech sector, Biden has promised to “take a really hard look” at anti-trust action against big tech companies.12 JP Morgan said a Biden White House would be a “neutral to slightly positive” for equities, adding that a “diplomatic approach” would reduce volatility.13

Seasonal choppiness and a strong dollar expected. As is typical in the month of August, currency markets may be choppy and the dollar strong. Given our bearish view on the dollar however, we see any seasonality-related rallies in the dollar as opportunities to sell dollars and buy foreign currencies.


1, 3, 8, 9, 10 Bloomberg
2 Europa.eu
4 Politco.eu
5 Federal Reserve (.gov)
6 Daily Express
7 PIIE.com
8 cftc.gov
9 TheStreet
11 Kiplinger
12 cnn.com
13 CNBC

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Scott Petruska, CFA
Written by
Scott Petruska, CFA
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