The widespread distribution of vaccines to combat the coronavirus pandemic and ongoing monetary easing could lead to the US dollar weakening as much as 20 percent next year, according to Citibank.
“When viable, widely distributed vaccines hit the market, we believe that this will catalyze the next leg lower[ing] in the structural USD downtrend we expect,” the US bank said in a research note. “Given this set-up, there is the potential for the dollar’s losses to be front-loaded, with the USD potentially falling by as much as 20 percent in 2021,” it added.
The forecast comes as the US-based biotechnology company Moderna said on Monday its experimental vaccine was 94.5 percent effective in preventing Covid-19, based on interim data from a late-stage clinical trial. A rival vaccine by US-based Pfizer and German firm BioNTech was found to have efficacy of 90 percent, while the developers of Russia’s Sputnik V vaccine reported a 92 percent efficacy.
Citi has also attributed the greenback’s potential crash to bets that the US central bank will continue to use all its tools to support the US economy next year. The Federal Reserve said it will keep rates low even if inflation expectations rise, which could potentially lead to the US yield curve steepening as well.
“This is important for FX, as when investors begin to rotate into value, they will increasingly rotate out of the United States, given valuations on both the SPX [Standard & Poor’s 500 Index] and USD are rich, versus the rest of the world,” Citi said.
The US dollar index against major global currencies was slightly higher on Thursday, at 92.43.
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