US dollar has been in a constant contraction. The dollar is now performing worse than its yearly performance from three years ago. Analysts begin to suspect the prospect of dollar for 2021. Will it regain its value back, or will it decline more?
U.S. dollar weakens, prospect questioned
U.S. Dollar has gone through a risk-off environment. Despite the circumstance, the dollar’s performance is still better than expectations. Reuters reported that the dollar has weakened around 3.0% last month. Accordingly, the dollar slumped to nearly 6% lower this year.
There are several reasons that might maintain the dollar’s position for the medium term. The COVID-19 pandemic mitigation in the U.S., along with hopes for fiscal stimulus and a vaccine are some of them. The dollar’s future is now in the hands of The Federal Reserve. The central bank will need to manage the markets and bonds purchase decisions better. These two factors will greatly affect the dollar.
Consequently, the euro recorded an 8% rise this year. As of Thursday, Reuters reported that the currency was traded for about $1.21. Several forecasts predicted the euro will gain around 2% in a year. With the rise, the euro will achieve its highest-12 month prediction since two and a half years ago, trading at $1.23.
However, several analysts also predict that the euro might lose some of its gains, pulling back the value to around $1.20 over the next three months. Upon this, Jane Foley of Rabobank mentioned that “there is the possibility we will see a little bit of a retrenchment. I’m not looking for the euro to totally fade away but I do think there is a possibility we have some sort of pullback in the euro in the next few months.”
Analysts debate on U.S. dollar near future in 2021
Despite U.S. dollar’s underperformance, several analysts insist that it has a big role in limiting currency from slipping too much. Thus, most currencies that showed significant growth against the dollar in 2020 might not see a repetition in the upcoming year.
Quoted from Reuters, Kit Juckes, FX Strategy’s head at Societe Generale mentioned, “You can’t have such an over-valued dollar, it’s as simple as that. The dollar had become and still is significantly over-valued on pretty much any measure that I can think of as a result of monetary policy divergence, and convergence takes away all reasons for that.
Similarly, Steve Englander of Standard Chartered told Reuters that, “we knew all the issues of dollar weakness, we just didn’t see any currencies that looked attractive. But right now, with the rebound in China and the pick-up in commodity prices, all of a sudden there are places to put your money.”