There are probably 2 diametrically opposed and disastrous scenarios based on the rise or fall of the dollar in 2021.
Above is a weekly chart of the DXY dollar index. We have posted it to understand exactly what is happening to the US dollar globally. We can see that the US dollar is falling disastrously against the major world currencies in the DXY index.
We propose 2 completely opposite and rather disastrous scenarios for investors. They can be fulfilled by the 4th quarter of 2021.
1.The US dollar falling 20-30% against a basket of major world currencies.
The fall of the US dollar could accelerate. The following inputs contribute to this: the huge amount of unsecured money printed by the US Federal Reserve, the election victory of US President Joe Biden as well as the end of the COVID-19 pandemic.
All of these factors “in theory” lead to a weakening of the US dollar. However, this could prove to be a real disaster for the emerging countries. Why? In fact, the Americans would be exporting their own inflation to the rest of the world, through the depreciation of their currency.
What would a sharp rise in inflation in South-east Asian countries, for example, lead to? First of all, a fall in the value of their bonds and rising bond yields. This would mean higher borrowing costs and put enormous pressure on businesses and local stock markets, which are already in bad shape, not to mention the total paralysis of the tourism business.
2.A sharp strengthening of the US dollar and the taking of the 1.0 level for the euro/dollar pair.
The scenario in point 1 seems the most likely to happen. However, what happens when everyone expects the same thing? Correct! The expected scenario plays out no more than 50% of the time.
An angry market can turn completely around and the US dollar can start to rise quickly. The absurdity is that this could also be facilitated by the end of the COVID-19 pandemic. Only the logic of the market will be slightly different. Since the pandemic is ending, then there is no need to print new money.
If no new money has to be printed, then the old money should be withdrawn from the system to prevent a massive increase in inflation. And that could lead to the collapse of the stock market, which is an inflated bubble all over the world. And it is the emerging markets that are going to collapse the most. Investors, getting rid of stocks and bonds denominated in local currencies, will go back into American dollars.
We all know what that leads to. It creates a rush demand for American treasuries. And an absurd situation is created. Yields on them drop sharply, and the U.S. dollar rises sharply at the same time.
Which of the 2 scenarios above will we see in 2021? Nobody knows, the main thing traders should remember is not to get in the way of the locomotive and try to look for market logic.
What awaits us today?
02.30 Bank of China interest rate decision
14.30 US Federal Reserve Bank of Chicago National Activity Index for November
16.00 EU Consumer Confidence in December
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