After an initial spike higher at the start of the coronavirus outbreak , the USD has since been on a constant decline.  

What has changed, and why do USD dynamics matter for the world’s financial markets? Could this trenc soon change its course?

Huge Growth of U.S. Money Supply

Money supply and demand imbalances explain much of a currency’s moves. In this case, since the pandemic started, the Fed flooded financial markets with dollars. By re-starting the quantitative easing, it literally prints digital money – numbers in bank accounts.

So did other central banks in the world. However, only the ECB printed more Euros than the Fed did, but the Fed also opened swap lines denominated in USD with other central banks. This meant more USD than Euros were in the financial system in a short period of time.

The U.S. fiscal expansion also contributes to the dollar’s debasing in the long run and to potentially higher inflation. As always, investors adopted a proactive tone and sold the USD in anticipation of higher inflation. This attitude also explains, albeit partially, the move higher in commodities like gold, silver, and even lumber.

Dynamics in the Geopolitical Space

The US-China trade deal and the ongoing negotiations created important flows to the current account. The current account deficit started to rise again after some improvements in the past years, suggesting a possible restructuring of central banks’ currency reserves.

The European Union got its act together and historically issued common debt. A game-changer for investors’ perception and a trigger of funds into the common currency.Naturally, to buy Euros, one needs to sell another fiat currency – the USD being the first option at hand.

Negative Yield on Treasuries

Last but not least, the Treasuries reaching negative territory and aligning with the developed world signals a shrinking appetite for U.S. debt. If investors are not willing to buy Treasuries anymore, or if demand shrinks even by a thread, the pressure on the USD continues and the bid for other currencies too.

It is best to view the changes in the USD from a macroeconomic perspective. Even important central bank decisions take time to create the desired economic effects.

So far, all roads lead to a continued weakness for the greenback.