Asset Movements Decide Currency Movements

As far as the US dollar is concerned a lot would depend on the US policies in the coming months as we quickly move past the US elections and the installation of a new government. While basic policies may not find any major shifts, there may be some modifications in the details. The approach towards global trade especially trade and tariff negotiations with China and the extent of the rejuvenation of co-operation with Europe would be the key planks on which the currency movements would most likely happen.

There is no reason to expect any changes in the Fed policy, and as it has been so far, the Fed may continue with its accommodative stance as conditions in the US have worsened to some extent due to the spread of the pandemic and also as a result of the second round of fiscal incentives not being agreed upon and released so far. The Fed will continue with its stance with the base rate at 0 to 0.25 % for a significant period of time till aggregate demand revives and inflation too moves up to the target levels. These measures may keep the US Dollar under pressure unless we see a jump in the asset demand for the currency.

In our earlier editions, we had indicated that the US elections and the time immediately after that is considered to be a time when there could be some volatility. It is perceived that it may be safer to stay in US Dollar. While there will not be any major policy sifts as such in the US, with new government coming in, there could be a different approach to pursuing the same policies, like in the case of trade and tariff negotiations with China. This may benefit the US as much as it is for the global trade and commerce.

The announcement from the ECB of further quantitative easing and a soft money policy for a longer period of time has weakened the Euro. This is accentuated by the fact that major countries like Germany, France and Italy have entered a phase of lockdown on account of the spreading pandemic in a second wave of infections across Europe. This is going to affect the economies depending on how prolonged it is going to be. But there is no let-up expected till the winter season is through going by some reports. This will have negative implications for the currency as well directly, as trade and external business is gradually coming to a virtual halt due to the lockdown and curfew, and the rigour at which it is being imposed this time around.

The Yuan gained lot of ground compared to the last six months on extremely positive economic data coming out of China on all the major macro variables including its trade. This helped the currency because it is a clear indication that the adverse effects of the pandemic are almost neutralised for the economy as a whole. The outlook for China is very positive going by what a number of analysts have forecast. That the economic recovery is happening fast, and that external trade is also closer to normal are the factors that will provide strength to the currency.



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