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Greatly exaggerated

‘The reports of my death are greatly exaggerated’ was Mark Twain’s sober response to media reports on the state of his health. The recent reports about the death of the US dollar as a reserve currency may be even more exaggerated.

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Yes, the Federal Reserve has been printing money like there is no tomorrow. And yes, trade tensions and the pandemic will likely regionalise some of the global business attached to a global reserve currency. But that is nowhere near enough to undermine the USD’s status. And replace it with what? The euro as an alternative was taken off the table by the euro crisis a few years ago. The Japanese yen has never been big enough, anyway. And the Chinese may not want to open their capital markets to facilitate a global reserve currency. What else? Bitcoin? Gold? Not big enough to stem a global economy and – as the cynics say – not backed by an army.

So what is weakening the US dollar?
The usual taxation of the rest of the world by the US. Whenever it is in the doldrums, the US prints its way out of it by swamping the world with dollars, thus debasing everyone’s holdings of the currency. This makes the US dollar lose its appeal (as our fundamental FX strategists say) or become the worst asset in the world (as our technical analysts say). For now. Not forever.

Despite the currency moves, the leadership in equity markets has not changed.

Christian Gattiker, Head of Research

The search for alternatives is on
In the meantime, the search for alternatives is on. The gold lever has been pulled. Bitcoin & Co is on the map as well. But most of the USD4.5trn sitting in money market funds will find its way into equities. Despite the currency moves, the leadership in equity markets has not changed – not even in regional terms, where the US continues to lead together with Chinese stocks. In currency terms, we have downgraded our US dollar view by upgrading the EUR/USD forecast to 1.20. The main concern for many remains the pandemic in the US, but the dynamics have turned more positive lately – in stark contrast to media coverage of the situation in the country.