Democrats Won't Let The U.S. Dollar Grow

The US dollar index resumed its decline this week and, having shed more than 0.5%, dipped below 90.50. USD bulls failed to gain a foothold above 91 points. Given that the White House will be now fully controlled by Democrats, active proponents of further fiscal stimulus to back the national economy, the likelihood that the dollar will keep growing tends to zero.

The dollar sell-off intensified on Tuesday on expectations that Janet Yellen, US President Biden's nominee for Treasury Secretary, would urge US lawmakers to adopt a new stimulus to stave off a long-lasting economic downturn. It should be noted that these expectations came true. In her statement before the Senate Finance Committee on Tuesday, Janet Yellen did call for a massive fiscal stimulus. In her speech, she noted that the US risks facing a longer and more painful recession if Congress does not approve the additional relief package. Based on these statements of the former Federal Reserve Chair, market participants suggested that Yellen could well push the dollar down in the long-term, especially taking into account the fact that weak currency is beneficial for the economy during this period of economic recovery and exorbitant levels of government debt.

In 2020, the US Congress allocated more than $4 trillion to support the economy, while Joe Biden’s administration proposed to add another $1.9 trillion rescue package. The new fiscal stimulus should provide another round of direct incentive payments, extending and increasing unemployment benefits, and creating a nationwide vaccination program. The proposal also contains longer-term goals for the Democratic Party, such as increasing the minimum wage to $15 an hour and expanding paid leave. It is worth noting that getting approval and passing these programs at the Congress will be the first Biden’s major task after his inauguration.

That being said, Democrats sweeping into power in the United States essentially marks the beginning of an extended weakness in the US dollar. Experts from a number of investment banks expect a 10% decline in the US dollar rate in 2021 against a background of an unprecedented economic stimulus. In this scenario, now is the best time to open short positions in the USD (DXY) index expecting its further decline to new all-time lows below 80.00 points.