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Dollar on borrowed time as U.S. twin deficits balloon

ForexDec 31, 2020 01:16AM ET
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© Reuters. FILE PHOTO: U.S. dollar banknote is seen in this picture illustration

By Wayne Cole

SYDNEY (Reuters) - The dollar was ending 2020 in a downward spiral on Thursday with investors wagering a global economic recovery will suck money into riskier assets even as the U.S. has to borrow ever more to fund its swelling twin deficits.

The euro stood at $1.2291, having hit its highest since April 2018 with a gain of almost 10% for the year. The next stops for the bull train are $1.2413 and $1.2476, on the way to the 2018 peak at $1.2555.

The dollar was lying at 103.15 yen, but managed to hold above the December low of 102.86.

It also fell against the Chinese yuan, breachingh 6.4900 for the first time since mid-2018, though Chinese banks were later reported to be buying dollars to limit the drop.

Sterling held gains after lawmakers approved a post-Brexit trade deal with the European Union, stretching as far as $1.3641 a level unseen since May 2018.

Against a basket of currencies the dollar had sunk to 89.643, having touched it lowest since April 2018. That left it down 7.2% on the year, and no less than 13% on the 102.99 peak hit during the market mayhem of mid-March.

The next target is 89.277 and then 88.251, which was the absolute low in 2018.

The prospect of a brighter 2021 has lessened the need for the safe-haven dollar, while burnishing the attraction of riskier assets especially in emerging markets.

Bears have also resurrected the "twin deficits" excuse for shorting the dollar - that the explosion in the budget and trade deficits means more dollars being printed and moved abroad.

From this perspective the new U.S. stimulus bill is dollar negative as it adds to the nation's debt, and President-elect Joe Biden is promising a lot more next year.

The country is also haemorrhaging dollars on its trade account where the deficit on goods hit a record $84.8 billion in November as imports surged past pre-pandemic levels.

Likewise, the current account deficit widened to a 12-year high in the third quarter and there was a large shortfall in net financial transactions as Americans borrowed more from abroad.

In contrast, the European Union runs a huge current account surplus, largely thanks to Germany, so there is a natural inflow to euros through trade.

"The U.S. dependence on foreign savings is increasing and at 3.4% of GDP, it is approaching a danger zone where it will become increasingly difficult to attract savings without further dollar weakness, or higher interest rates," said Alan Ruskin, global head of G10 FX at Deutsche, in a note.

"The deterioration in the 'twin deficits' will do nothing to improve USD sentiment, even if it does not as yet justify extreme USD undershooting either."

Dollar on borrowed time as U.S. twin deficits balloon
 

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Comments (14)
Murray Asher
Murray Asher Dec 31, 2020 11:01PM ET
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Well it's about GD time the USD crashed Hard. Should have happened in 2009!!!
Jason Bacon
Jason Bacon Dec 31, 2020 12:38PM ET
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News that Yellen will seek to srengthen the dollar when she comes in. Nice dream, raise interest rates NOPE reduce dollar printing NOPE say the dollar is strong on news YEP
Michael Cruz
Michael Cruz Dec 31, 2020 8:15AM ET
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Promising to keep interest rates down is a joke when you dont fully have the power to control that.America is in for a reckoning.
Brandon Wooton
Brandon Wooton Dec 31, 2020 2:28AM ET
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currency debasement at its finest.
Chris Mallory
Chris Mallory Dec 31, 2020 12:57AM ET
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Let's all shop at Dollar Tree
Akram Baloch
Akram Baloch Dec 31, 2020 12:05AM ET
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Nice
Dietmar Stahl
Dietmar Stahl Dec 30, 2020 11:57PM ET
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Lets all get universal income and stay at home while robots do all the work
Jesse Mulliniks
Jesse Mulliniks Dec 30, 2020 10:51PM ET
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Common sense is lacking. The dollar is delcining due to the fed printing unlimited money
Jack Zhang
Jack_A Dec 30, 2020 9:36PM ET
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The US system worked by sending papers out and importing goods, thus trade deficit. You either have a trade surplus or dollar as world currency, not both.
Silence Dogood
Silence Dogood Dec 30, 2020 9:19PM ET
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The wokes are gonna be missing Trump bad real soon.. just watch. Severe buyers remorse coming soon!
Joel Schwartz
Joel Schwartz Dec 30, 2020 8:54PM ET
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By preventing a recession during an election year for political reasons, the FED ensured we would have a depression during Biden’s time in office. They’re so far gone - they burned the country’s next decade to give themselves another six months of euphoria.
Michael Angelo
Michael Angelo Dec 30, 2020 8:49PM ET
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Interesting, get ready for a tweak sooner than later. Interest rates? Will see how sleepy joe & co deals with this crisis or US goes to the showers very soon.
Sol Weinberg
Sol Weinberg Dec 30, 2020 8:29PM ET
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I suspect we will see more and more headlines like this over the coming days, weeks, months. Find a way to preserve your wealth
Kaveh Sun
Kaveh Sun Dec 30, 2020 8:08PM ET
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I’m buying usd here n hold it for a few days.
 
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