Will the dollar return to the throne in Q3?

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

The greenback stands to gain not only from its safe-haven status but the fact that it is also the world's reserve currency

  

The mighty dollar was not so mighty against G10, Asian and most emerging market currencies in Q2 as investors focused on the easing of lockdown restrictions and news around the vaccine trials.

Buying sentiment towards the greenback went downhill thanks to central banks enforcing unprecedented measures to shore up their economies and governments announcing handsome fiscal packages in the fight against COVID-19.

The inflated optimism boosting appetite for riskier assets at the expense of safe-havens shows a clear disconnect between economic fundamentals and markets, and has worsened matters for the currency. Given how the world economy is projected to contract anywhere between 4.5% - 5.5% in 2020 and overall sentiment still pressured by a plethora of negative themes, the dollar still has a shot at reclaiming the throne this quarter.

Like it or not, COVID-19 will remain a major theme over the coming weeks as an increasing number of new COVID-19 cases in Asia, Europe and the US foster a sense of unease.

The risk of a new round of lockdowns is set to jump as fears intensify over a second wave of COVID-19 infections that could bring the world to a standstill again. With the world economy still nursing deep wounds inflicted from the first round of lockdowns, another wave may have crippling consequences that global authorities may struggle to solve. Such an unfavourable situation may send investors rushing towards the currency as a hotspot for safety.

Developments in the US will certainly influence the Dollar’s valuation over the coming months. The Greenback stands to gain not only from its safe-haven status but the fact that it is also the world’s reserve currency.

While economic fundamentals seem to be improving with retail sales rebounding by a record 17.7% in May and the US economy adding 4.8 million jobs in July, rising COVID-19 cases could sabotage any meaningful recovery. It must be kept in mind that the number of new cases in the US exceeded 50,000 for the first time on the first day of Q3, led by record increases in California, Texas and Arizona. The threat of COVID-19 digging its poisonous claws into major industries and sectors once again does not bode well for economic growth.

As the third quarter of 2020 gets underway, there still remains a sense of gloom in the air, especially after the World Health Organisation (WHO) warned that the worst is yet to come. A tidal wave of risk aversion may flood global markets over the coming months as investors not only juggle with the COVID-19 chaos, but US-China trade uncertainty and geopolitical tensions is among many factors draining investor confidence. As riskier assets fall out of favour amid the caution and risk-off mood, king dollar may be injected with enough inspiration reclaim the iron throne.

* Any opinions expressed in this article are the author’s own

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