The dollar lost almost 5% in July 2020, its worst monthly performance in 10 years. Political uncertainties, trade tensions, rising unemployment and the presence of the virus all contribute to weakening the greenback.
The dollar caught in a downward spiral
The dollar is paying for the recent increase in Covid-19 cases, its loss of activity and tensions with China. Since March, the US currency has lost almost 12% against the euro, falling from $1.06 to $1.19 at the end of July. In this month alone, the fall was 5%.
According to several market specialists at the major investment banks, the dollar's decline is set to continue, even if its pace may slow over the coming months. Deutsche Bank is betting on a euro-dollar parity of 1.20 at the end of 2020, 1.25 at the end of 2021 and 1.30 at the end of 2022. However, in a recent note, its analysts felt that these forecasts were probably "too cautious". At Goldman Sachs, strategists anticipate a further decline in the dollar index of more than 5% over the next 12 months.
Less attractive yields
While at the start of 2020, investors could look forward to attractive returns by placing their cash in the dollar, the coronavirus crisis has limited the yields on offer, and consequently the attractiveness of capital flows to the USA. "U.S. rates, short and long, were the highest-yielding in the G10 for almost 3 years", but "they are now far from exceptional", testifies Deutsche Bank. In March, the US Federal Reserve (FED) once again decided to cut its key rates by one point. Rates are now between 0 and 0.25%.
Is the dollar still a safe haven?
The dollar is gradually losing ground to the euro and, above all, to gold, which has established itself as a benchmark safe-haven asset in the face of the pandemic and Sino-American tensions. Helped by the depreciation of the dollar, gold reached new all-time highs last July, peaking at 1945.28 dollars an ounce.
While some analysts consider that the dollar is no longer a safe haven, as the security premium it enjoys is becoming less and less justified for investors, others have named it the best safe-haven currency for 2020. In a research note published in August, Morgan Stanley points out that falling US interest rates make it "a more attractive funding currency for carry trades". Despite this forecast, analysts expect risk sentiment to remain buoyant, and maintain a "bearish bias" on the dollar.