This situation complicates the equation for central banks, and can mark a change of era.

The dollar-yen at 104, the dollar-yuan at 6.53, the euro-dollar at 1.21 or the DXY index at 90.6... this could end up worrying economists and markets. The current weakening of the dollar has various possible explanations. "After years 2018-2019 when Donald Trump's policy (lower taxes, higher tariffs) had the effect of attracting capital to the United States, we can imagine that the prospect and then the change of administration with the election of Joe Biden could stabilize (at least) or reverse the movement, recalls Didier Saint-Georges, member of Carmignac's investment committee. In addition, we must take into account the Covid-19 crisis: with an extraordinary budgetary support plan, the widening of the public deficit to 16% of GDP - while we were already worried at 5% of GDP - and the Fed's unprecedented money creation policy will end up raising the question of intrinsic value. Relative to other currencies in particular.

The euro could strengthen further, "with a positive effect for countries like Italy that export mainly to the bloc, to the detriment of Germany and France that export mainly abroad," said John Plassard, an investment specialist at Mirabaud. And the yuan appreciates even more, "because China, whose economy is recovering, has not resorted to the same level of money creation," continues Didier Saint-Georges.

For him, massive injections of dollar liquidity have fulfilled their role as a "lubricant" for the economy in 2020, to the benefit of global growth: "But beyond a certain level, and especially if the movement is too fast for companies to adapt, a fall in the dollar can call into question the competitiveness of certain regions or economies such as the euro area." "Knowing that the US economy is much less dependent on exports (12% of GDP) than the Japanese, Korean or German economies (nearly 50%), but also that the positive effect on US competitiveness is only temporary, and not a structural change, adds John Plassard. Economists had long anticipated for fundamental reasons the decline of the dollar against the euro while markets saw a return to parity in early 2020. While this generally favours certain cyclical sectors/values and small caps, it is not without danger for others such as luxury and especially aeronautics."

A real break?

"We can consider this decline in the dollar as a structural challenge to confidence in the world's largest economy and its currency, especially in view of the current political, institutional and social crisis," said Wilfrid Galand, strategist at Montpensier Finance, about a president who manages to make a third of the population believe that elections are Rigged: "This may call into question the ability of markets to buy US Treasuries issues, which are expected to reach 4.5 trillion in 2021 (after 3.4 trillion in 2020), while the Fed will reduce its liquidity injections to 3.3 trillion (after 8.000 billion in 2020)."

Role of inflation

A second possible effect is on inflation. Mechanically, whether through a supply or demand effect, the prices of commodities denominated in dollars (oil, precious metals, industrial metals, other materials...) rise when the greenback decreases (all other things being equal), this can cushion the effect for the currencies of the countries concerned when they are pegged to the dollar, but also an upward effect on inflation (as measured by it) of importing countries such as the United States. "The central bank has anticipated this a little by modifying its monetary strategy in order to let inflation slip in favor of employment since the end of August. But her next communication will be complicated because she knows that the effect of her measures always takes time, about six months, and that with this crisis and vaccines, the situation may have changed by then, "says John Plassard. "The Federal Reserve's interventions have played a big role in inflation expectations, whose 5y5y swaps have risen from 1.50% in May to 2.3% now," galand said. It may seem abstract, but it is very concrete, beyond the doctrines, if the purchasing power of American households falls too suddenly, knowing that other reasons, including regulatory and ecological, can increase prices in the future." Between a "twist" operation to absorb the rise in long rates and a desire to to normalize and repent the curve, "the Fed will play a complicated balancing act," summarizes Didier Saint-Georges.

Finally, the decline of the dollar can – like the rise in public debt – raise the question of the value of the currency in absolute terms. "Until then, bitcoin followed the dollar rather, while both curves have inverted recently. I hope that this is not an advanced sign of a return to divergence, after a year of convergence, on the issue of public debts in particular, "analyzes Wilfrid Galand. "If economic agents lose confidence in the central currency, they can fall back on real assets such as gold or alternative currencies," concludes Didier Saint-Georges, trying not to draw a definitive line on the "monetary system" of recent decades.