Dollar on borrowed time

SYDNEY (Reuters) – Forex Signals | The dollar was ending 2020 in a downward spiral on Thursday with investors wagering a global economic recovery will suck money into riskier assets even as the U.S. has to borrow ever more to fund its swelling twin deficits.

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The dollar was lying at 103.15 yen, but managed to hold above the December low of 102.86.

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Against a basket of currencies the dollar had sunk to 89.643, having touched it lowest since April 2018. That left it down 7.2% on the year, and no less than 13% on the 102.99 peak hit during the market mayhem of mid-March. The next target is 89.277 and then 88.251, which was the absolute low in 2018.

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Bears have also resurrected the “twin deficits” excuse for shorting the dollar – that the explosion in the budget and trade deficits means more dollars being printed and moved abroad.

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From this perspective the new U.S. stimulus bill is dollar negative as it adds to the nation’s debt, and President-elect Joe Biden is promising a lot more next year.

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The country is also haemorrhaging dollars on its trade account where the deficit on goods hit a record $84.8 billion in November as imports surged past pre-pandemic levels.

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Likewise, the current account deficit widened to a 12-year high in the third quarter and there was a large shortfall in net financial transactions as Americans borrowed more from abroad.

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In contrast, the European Union runs a huge current account surplus, largely thanks to Germany, so there is a natural inflow to euros through trade.

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“The U.S. dependence on foreign savings is increasing and at 3.4% of GDP, it is approaching a danger zone where it will become increasingly difficult to attract savings without further dollar weakness, or higher interest rates,” said Alan Ruskin, global head of G10 FX at Deutsche, in a note.

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“The deterioration in the ‘twin deficits’ will do nothing to improve USD sentiment, even if it does not as yet justify extreme USD undershooting either.”

Dollar on borrowed time