The dollar, safe haven or not?

Could the greenback fall further after its recent fall?

The dollar has appreciated sharply against most other currencies during the coronavirus crisis, but since April it has lost its luster. How to explain it and, above all, how do the coming months look?

Higher then... Lower

When Covid-19 spread around the world, masses of capital took refuge in uncle Sam's lap, reaffirming the dollar's safe-haven status. But the United States has failed to escape the pandemic. On the contrary, the virus has spread violently, to the point of paralyzing the economy. While in many countries the health crisis was easing, Americans were sinking deeper and deeper into a health crisis. The fear today is that the U.S. economy will recover after others.

The budget deficit has widened, which has worried many investors.

Interest rates have fallen more in the US than elsewhere, so much so that the yield differential offered on US government bonds relative to euro bonds has halved. The US central bank has reduced its key interest rate from 1.75% to 0.25% and everything indicates that it will not raise it anytime soon. As a result, capital quickly deserted the US market to the point of significantly lowering the dollar against other currencies such as the euro (-9% since April), the pound sterling (-13%) and the yen (-5%).

And now?

The greenback will continue to fluctuate sharply as long as the health crisis in the United States lasts, all against the backdrop of the election campaign. Very clever who could say how the situation will evolve. Everything will depend on how quickly the virus is defeated across the Atlantic. But we must also take into account the risk of a second wave of contamination being triggered elsewhere in the world. These factors could quickly restore the dollar's momentum.

For the long term, we do not see where a pronounced downside risk could come from for a dollar that is and still remains the largest reserve currency on the planet. Investors will sooner or later re-appreciate the dynamism of the US economy and if there were to be panic, the greenback would soon regain its followers.

Your investments

The dollar always deserves a place in any well-diversified portfolio. Dollar bonds remain attractive thanks to the rate differential (even if mitigated) they enjoy against other currencies and also thanks to their status as a safe haven. U.S. equities, on the other hand, deserve a place in the portfolio of investors with a dynamic profile.