Two key factors led the market last week: the possible launch of effective vaccines against COVID-19 and the expectation of further monetary stimulus from central banks. However, the current situation has worsened the correlation of most world currencies. Experts fear that the growing contradictions between the main and emerging markets (EM) currencies will provoke a conflict.
Some analysts are afraid of a collision of interests of leading currencies, primarily the dollar and the euro, with the means of payment of other countries. Throughout the previous month, emerging market currencies took the advantage amid investors' growing willingness to acquire risky assets. Experts stated that this has not happened over the past two years. In case that the USD further weakens, EM currencies are expected to continue rising, marking the longest growth in eight years.
In view of this, many experts are pessimistic about the US dollar. Statements about its weakening have become an accepted truth, and some opponents agree. On the contrary, few currency strategists believe that the US dollar will strengthen again, recalling that the USD started with a full-scale collapse earlier this month. The situation is currently tense and only the euro, US dollar's rival in the EUR/USD pair, is still winning. However, experts believe that this victory will not last long, since the ECB has lost the so-called battle of the money-printing press.
Over the past weeks, the Eurocurrency has clearly risen, despite massive cash infusions from the ECB. It gained an advantage after the Fed cut interest rates to zero and also started the printing press at full capacity. As a result, the balance of the US regulator surged by $ 3.213 trillion, while the European one by € 2.2 trillion. At the upcoming December meeting on December 10-11, the ECB plans to increase cash injections into the European economy to minimize the negative impact of COVID-19. Several analysts assume that Europe may lose the devaluation race, and this could bring down the Eurozone economy by 8.3%.
Analysts say that the current situation threatens an imbalance in the EUR/USD pair. Currently, the indicated pair manages to maintain balance, despite the dollar's weakness and euro's growth, which has managed to push the limits of the previous range of 1.1700-1.2000. Based on specialists' observations, there are no significant obstacles foreseen for the euro heading to the level of 1.2500. Today, the EUR/USD pair is trading near the range of 1.2131-1.2132, slightly declining after the weekend. However, experts consider these losses insignificant.
Before the New Year, analysts are concerned that the US dollar will most likely collapse further. This is facilitated by the tense COVID-19 situation in the US and Fed's increase in the money supply by 22%. The market being flooded with dollars led to its depreciation and so, the consequences of this decision will be dealt in 2021. Some analysts, in particular Peter Schiff and Stephen Roach, think that there's still a 50% chance that the US dollar will collapse next year. On the other hand, calculations of other economists are less pessimistic: Citigroup believes that the "New Year" dollar devaluation will not exceed 20%, and Morgan Stanley expects it at 35%. The market is worried about the continuation of the US dollar's downward trend in the new year, but there is still a small hope for a positive reversal.
According to experts, a major currency conflict between the EUR and USD, as well as the EM currencies, is not expected in the near future. The leading means of payment do not need to share the global financial space, since they already lead the global market. Still, experts do not rule out point outbreaks next year, but these potential currency wars are not important.
The material has been provided by InstaForex Company - www.instaforex.com