What’s In Store For The Dollar
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From Goldman Sachs Research, this is Allison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're focusing on what's in store for the US dollar. After the dollar surged in late March as investors rush to its safety amid the global onset of the corona crisis, its value has since declined sharply to the lowest level in over two years. As uncertainty about the virus trajectory and the global economic recovery continues to loom large, Whether this retrenchment marks the start of a multiyear dollar down cycle and even more
The most important thing to remember is that the US dollar is like two currencies. It's a domestic currency, but it's also an international currency. The dollar denominates many goods and assets outside of The US economy. And this unique global role for the dollar creates a negative correlation between the value of the currency and the health of the global economy. When the global economy is doing well and growth is high, the dollar tends to weaken. And when the global economy is doing poorly and heads into recession, the dollar tends to strengthen. These global developments have had a bigger
Going forward, Zach has high conviction that a period of sustained dollar downside lies ahead.
We think that the dollar has entered a period of trend depreciation that's likely to last a few quarters, maybe even a couple of years. And the reason is that the standard factors that we look at to inform our broad dollar views are all pointing in the same direction at the moment. The dollar is overvalued by something like 10 to 15%. Real interest rates in The US are deeply negative and likely will be for some time, and the global economy is recovering from the coronavirus recession. We see these factors as a standard recipe for broad dollar weakness. In the past, when the dollar has gone thr
And while Zach sees the trajectories of the pandemic and of vaccine development as risks that might affect the timing of dollar weakness, he thinks they likely won't impact the medium term dollar outlook.
With regard to the pandemic, investors should think about not just how The US is performing relative to the rest of the world, but the overall outlook for the coronavirus and the world recovery. The dollar is likely to benefit if The US economy is controlling the virus and doing much better than the rest of the world, but the dollar may also weaken if the overall world economy is recovering from the coronavirus episode.
Goldman Sachs is relatively optimistic in its vaccine assumptions, basically assuming that we get at least one vaccine approved for emergency use by the FDA before the end of the year, and we begin to see rollout in 2021 with substantial portions of the developed market populations receiving the vaccine at some point in the coming year. If we see a delay in the vaccine, what would be the implications for the dollar?
Bad news on the vaccine is likely to be good news for the dollar, especially relative to emerging market currencies. Many emerging market countries have struggled with pre vaccine virus control, so they will benefit disproportionately from vaccine development. That's one of the reasons why we're relatively encouraged on the outlook for EM assets. A long vaccine delay would likely support the dollar versus a variety of emerging market currencies, but it could result in dollar weakness versus some other crosses, including the Chinese yuan and other Asian currencies, which have controlled the vir
I then spoke with Barry Eichengreen, professor of economics
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