Escape from the dollar

According to experts, July 2020 could be the worst for the dollar in 10 years. The U.S. currency is under pressure from the conflict between Washington and Beijing, the spread of the coronavirus in the U.S., expectations of further Fed interest rate cuts and the uncertainty of the presidential election in November. According to Bloomberg, the net non-commercial short futures position on the dollar against the 8 major currencies reached record highs since April 2018.

Is it worth to sell the dollar now, and in which currency pairs it will be the most profitable? Alexander Kuptsikevich, analyst at FxPro, answered the question of Fortrader magazine.

The dollar is selling off too wildly

- The flight from the dollar gained frightening momentum in July. Very often this peak of pessimism precedes a rebound, which is to be feared in the near term.

Globally, it is hard to counter the seriousness of the dollar bears' arguments. The U.S. economy is once again at risk of being hit by a resurgence of contagion. This is a disadvantage for the dollar in the long run. Equally alarming is that by helping the Fed economy, the U.S. government is handing out money to the financial system and households. All of this devalues the value of the U.S. currency. You can also add to this the chronic deficits and dangerously high debt burden.

However, it is important to remember that movements in the currency market are never one-sided. Declining almost daily over the last month, the dollar index lost 4.5% and touched its lowest values since September 2018.

In the course of its failure, the index fell below the support line of the 9-year uptrend. The fundamental situation really sets up a global trend reversal and the potential start of a multi-year weakening of the US currency.

EURUSD at 1.6

However, it's worth noting that the sell-off is going too fast right now. It feels like the dollar bulls just retreated and are waiting for the right moment to counterattack.

Perhaps the U.S. Fed will pay attention to the weakness of the dollar, which it has shown over the past month. The mere mention of this could trigger impulse buying.

The Treasury needs to service huge debts and raise trillions of dollars from the market to fund programs to support the economy.

The weakening of the national currency can pull up government bond yields, which leads to higher government debt service and may lead to loss of interest in U.S. debt. Therefore, we should not be surprised if the U.S. Treasury strengthens its rhetoric in favor of a strong dollar, thereby cooling the fervor of sellers.

Looking beyond short-term fluctuations, massive central bank stimulus promises to cause a surge in commodity and agricultural prices. This promises to bring currencies such as AUD, NZD.

A more conservative choice is the euro. Levels near 1.07 earlier this year coincide with the support line for EURUSD over the last five years. The new multi-year cycle of growth of the single currency can send the pair not only above 1.40, but even take it beyond 1.60. However, this is too distant and uncertain future. In the more immediate short-term it is still worth focusing on a certain rate correction.