Weaker dollar – stronger emerging market currencies

Window of an exchange office in Hong Kong

Compared to other emerging market currencies, the Chinese yuan was much more stable in 2020.

(Foto: action press)

Frankfurt 2020 was extreme in many ways – that goes for the foreign exchange market too. Especially at the beginning of the corona crisis in spring, there were dramatic fluctuations in the markets. Investors avoided any risk and fled to the US dollar.

At the end of the year, the trend was reversed: the prospect of a corona vaccine and an imminent recovery in the global economy made investors’ risk appetite rise again significantly. Most experts expect this trend to continue in 2021.

“Economically, things should pick up noticeably in spring at the latest,” expects DZ Bank’s foreign exchange analyst Sonja Marten. It assumes that the countries that suffered the deepest recession this year will see particularly dynamic growth next year.

The experts at Bank of America around Athanasios Vamvakidis. In her view, risk appetite will remain the key driver for the markets in the short term and this will weigh on the US dollar in particular.

From their point of view, this is only likely to change once the normalization of the economy has been completed and the markets price in a tightening of monetary policy by the US Federal Reserve. Or if the willingness to take risks declines again because the economic recovery is weaker than expected.

The dollar would be less in demand with greater risk tolerance

Naturally, the dollar as the world’s reserve currency attracts the greatest attention in the foreign exchange market. Many analysts expect a weaker dollar. They argue that it will be less in demand as a so-called safe haven when the world economy recovers.

In addition, the interest rate differential to other currency areas narrowed during the corona pandemic because the US Federal Reserve responded more strongly to the crisis than elsewhere. This means that an important argument that spoke in favor of the dollar in the past has disappeared.

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