Dollar treads water as US deficits swell

The US dollar ended 2020 in a downward spiral with investors wagering a global economic recovery will suck money into riskier assets even as the US has to borrow ever more to fund its swelling twin deficits.

The euro ended 2020 at $1.2291, having hit its highest since April 2018 with a gain of almost 10% for the year.

Against the Japanese yen, the dollar was trading at 103.15, managing to hold above the December low of 102.86. It also fell against the Chinese yuan, breaching 6.490 for the first time since mid-2018, though Chinese banks were reported to be buying dollars to limit the drop. Sterling, meanwhile, reached $1.3641, a level not seen since May 2018.

Against a basket of currencies the dollar sank to 89.643, down 7.2% on the year, and 13% from the 102.99 peak hit during the market mayhem of mid-March. It is at two-year lows against.

The prospect of a brighter 2021 has lessened the need for the safe-haven dollar, while burnishing the attraction of riskier assets, especially in emerging markets.

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

From this perspective the new US stimulus bill is dollarnegative as it adds to the country’s debt, and President-elect Joe Biden is promising a lot more in 2021.

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.

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.

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.

“The US 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 foreign exchange at Deutsche Bank.

“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.”