Dollar dominance reflects risk climate

BENGALURU: The US dollar will continue to dominate currency markets for at least another three months as investors prefer the safety of the greenback in a world fraught with risks emanating from the coronavirus crisis, a Reuters poll shows.

Having brought the world economy to a near-standstill and caused the fastest rout in financial markets since the Great Depression, the Covid-19 pandemic is likely to deter investors from taking risky bets until signs of recovery emerge.

But with the world economy bracing for a slow and potentially prolonged recovery, the dollar is likely to remain favoured by investors whose priority now is preserving their capital.

While most major currencies have sustained deep losses, the dollar has gained over 3.5% this year.

“Although perhaps we have gone through the initial panic phase, over the next couple of months we are going to see a lot of economic data, and this data invariably will be shockingly poor,” said Jane Foley, head of forex strategy at Rabobank. “I think it’s going to be a very low-risk environment from the point of view of investors and … there will be big reluctance to move into some of the more vulnerable countries in the world.”

A majority of analysts who answered an additional question — 26 out of 34 — said the dollar’s dominance would at least continue into the next quarter. Seven said less than three months, while only one said it was already over.

But any moves out of the dollar will depend on how the pandemic plays out. Without any dramatic shift in risk assessment, capital is likely to favour developed markets that are considered low-risk.

Analysts are less optimistic about the dollar’s performance over the longer term, as they expect the global reserve currency to give up some of its gains in a year’s time.

While most major currencies are expected to rise against the greenback over 12 months, their gains still might not cover the losses seen so far this year.

Despite the euro’s underperformance in the spot market, median forecasts have stayed remarkably stable, suggesting no real change to its outlook, except for a lone voice predicting the currency to hit parity against the dollar in six months.

The euro, the most liquid among currency pairs, is forecast to make up all of the 3.5% loss it has incurred this year and gain another 2% to trade around $1.14 in 12 months.