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Dollar: one is for, two is against! Will the deterioration in the US financial situation and the rapid growth of the Fed balance sheet


The collapse of Brent and WTI quotes was a real test not only for oil companies and currencies of exporting countries of black gold, but also for local authorities in the United States. According to the Wall Street Journal, not only Texas, but many other states in recent years have increased their dependence on oil. Their protracted recovery may become a major obstacle to the American economy in 2021. The White House also understands this, which is considering options for helping oil companies in exchange for ownership shares or black gold reserves. However, the problems of energy growth are far from the only “bearish” factor for the greenback. 



It would seem that the shock caused by the decline in WTI quotes below the zero mark and the drop in US stock indices should have supported EUR / USD sellers. In fact, this did not happen, as investors are weighing the increased risks of a long-term weakening of the US dollar. According to the forecasts of the Committee on Responsible Federal Budget (CRFB), the budget deficit in 2021 can increase by 4 times and reach almost $ 4 trillion, the size of public debt by 2023 will overwrite the record that took place in the post-war period. 


The dynamics of the budget deficit and US debt


Source: Bloomberg.

Colossal debt will hamper the recovery of the US economy. Moreover, the States will need to weaken the dollar in order to attract Treasury buyers from abroad. Otherwise, they risk making the process of bloating the Fed's balance sheet uncontrollable. 

Within a week by April 15, the Federal Reserve increased its asset purchases to $ 41 billion per day, expanding its balance sheet much faster than that of colleagues from Frankfurt and Tokyo, which cannot but cause concern among greenback fans. Yes, an increase in the yield of Italian bonds and their spreads with German peers strengthens the risks of expanding the European QE from € 1 trillion to € 2 trillion, but in the short term this factor can play into the hands of the euro. In times of crisis, investors seek not to earn, but to save their money, so low rates on debt markets are becoming more attractive than ever. You don’t need to go far for examples, just remember how the EUR / USD couple reacted to a sharp decrease in the federal funds rate and the European Central Bank’s increase in the quantitative easing program by € 750 billion.


The dynamics of central bank balances


Source: Bloomberg.


The dynamics of the differential yield of bonds of Italy and Germany


Source: Financial Times.

Yes, the greenback has many vulnerabilities, but it is hardly worth counting on a rapid EUR / USD rally. The European economy is weak, and the global recovery is likely to drag out. 60% of the more than 3.5 thousand executives of the largest companies from 109 countries surveyed by Reuters believe that global GDP growth will resemble the letter U, 22% insist on the letter W. Under these conditions, the demand for safe haven assets will remain increased , and medium-term consolidation of the main currency pair runs the risk of drag. So far, its range is seen as 1,065-1,115.


LiteForex Analyst Source


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