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Whether the Fed will wipe the smile off the face of the dollar? The Fed continues to flood the global financial system in the US printed mon


Coronavirus forced Washington to step on the throat of the slogan "America First!" The Fed announced the creation of a new financial mechanism, which will allow foreign central banks to obtain dollars for temporary use in exchange for their existing in the hands of US Treasury bonds; and Donald Trump intends to report on the 90-day deferral of import tariffs. He still assures Americans that China pays a fee, but in a collective letter to more than 100 CEOs of major US corporations asserted that the use of trade barriers in a pandemic worsens recession and reduces employment. 



According to forecasts of Goldman Sachs, the US GDP prosyadet by 34% y / y in the second quarter, and the unemployment rate will rise to 15% by mid-year. At the same time the ranks of supporters of the V-shaped recovery in the US economy are melting before our eyes. Moody 's Analytics believes that in April-June gross domestic product will shrink by 25% in July-September, will expand by 15%, but in October-December, the economy will be very limp. Morgan Stanley expects the global GDP will decrease by 2.2% in the first half of 2020 and will increase by 1.5% in the second, with the majority of countries will not reach their pre-crisis levels. 


of global GDP forecasts


Source: Bloomberg.

Reasons outlook change to be found in the coronavirus, forecasting the timing of which functioning goes beyond the limits of professional competence of economists. The longer the pandemic, the greater the chance that we will get no V-, and U-shaped recovery of the global GDP. The greater the chance of realization of the "dollar smile" theory. 

A strong greenback is not included in the Fed's plans, which is doing everything possible to weaken its own currency. Moreover, the central bank is no longer hide the fact that engaged in competitive devaluation. According to the Federal Reserve Bank of Cleveland President Loretta Mester, the recession sharp decline in the federal funds rate causes little impact on the dollar than during the expansion of GDP. 

Currency swaps with 14 foreign central banks and repurchase transaction with the 170th regulators have accounts with the Federal Reserve Bank of New York, whose countries are not subject to economic sanctions - is nothing but an attempt to weaken the greenback. According to Federal Reserve estimates, reserves of Treasuries in the hands of foreign central banks total $ 6.86 trillion. Many of them are due to the shortage of dollars in the domestic market started to sell Treasury bonds, which increases US debt market volatility. Why in such circumstances, do not use for a long time operating in the corporate sector of REPO transaction?

Stepping in this direction, the Fed essentially recognized the status of the central bank of the world. Flooding the market of cheap liquidity, it is trying to prevent a wave of defaults, which would exacerbate the global recession. At the same time the Fed strikes the greenbacks, whose strength, according to the EUR / USD reaction more than the aggressive rate cuts. Will it have the central bank to pull the plug fans to the theory of "dollar smile" Time will tell, but for now the main currency pair is set to consolidate in the range of 1,092-1,117.


analyst LiteForex


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