Forex Comment Jul 20

Strong euro sinks US dollar, drags up yuan 

Major states in the US are on the verge of renewed lockdown and the strong possibility of a double-dip recession; this will affect the value of the dollar

Strong euro sinks US dollar, drags up yuan 
Yuan rising. Image: AFP.

(ATF) Signs of the times! As European leaders, after a long-hours weekend, inch closer to agreeing to a $860-billion rescue package for their virus-decimated economies, Beijing announces that the latest cluster of infections has been contained. And the US announces record numbers of new infections, with no end in sight.

The three major currencies representing the three regions paint an accurate picture of the situation:

The EUR jumped to its highest level (1.1459) since October 2018, dragging the yuan up with it to 6.9885 versus the US dollar after the PBoC had set central parity at 6.9928 on Monday morning. That pushed the US dollar down to its lowest level since early February, to 95.7510 on the DXY at 7pm HK time.

These are no longer the Fukoku Kyohei (Rich Country, Strong Army) days of Japan's Meiji era or the much earlier Fuguo Qiangbing of China's period of the Warring States.

But there can be no doubt that the utter inability of the US to come to grips with the coronavirus crisis has seriously damaged global US influence.

Where do we go from here with the EUR - CNY - USD tri-currency relationship?

The virus will tell. 

For now, most of Europe, while not out of the woods yet, appears to be doing well with its reopening measures and the EU economies will follow suit.

China has resolutely reacted any time the virus has threatened to make a comeback and the economy is clearly on a robust recovery path. No massive fiscal stimulus measures comparable in scale to 2008/2009 have been needed to bring that about. No huge new wall of debt will hit the Chinese economy.

Deeper into debt

By contrast, in the US, several major states are on the verge of renewed lockdown and the strong possibility of a double-dip recession.

This will affect the value of the US dollar, the more so as renewed lockdowns will force the US government and the Fed to go even deeper in debt than the record levels to date.

I was moderately skeptical when ex-Morgan Stanley Asia head Stephen Roach forecast a sharp dollar decline in mid-June.

Consider me among the converted.

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