Everything contributes to the weakening of the US currency. But not to the point of knocking her off her pedestal.

Return to normal or start a lasting diet change? This summer, the rapid slide of the dollar has been one of the major market trends. The greenback not only weakened against the euro, touching 1.20 in early September, but against all major currencies, as shown by the 7% decline in four months in the DXY index. A decline whose speed has even led some economists to question the risk of losing the reserve currency status enjoyed by the US currency.

If put into perspective, however, this correction appears limited by historical standards, and the dollar is still considered overvalued. The DXY Index has only returned to its level of early 2018. There is still a long way to go before recording a plunge comparable to those that followed the explosion of the Internet bubble in 2000 (-32% until 2004) and the famous Plaza agreements of September 1985, where the major G5 countries had coordinated to weaken the greenback by nearly 50% in eighteen months. The summer downturn is explained by a renewed risk appetite among investors after the shock at the beginning of the year, but also by the increasingly accommodative policy of the Federal Reserve. The yield differential in favour of the United States has narrowed considerably, by almost 140 basis points for example between the US and German 2-year rates.

Political uncertainty also plays a role, whether it is the outcome of the US presidential election or the inability of Democrats and Republicans to agree on an extension of household aid. The galloping indebtedness of the United States and the headlong rush of the Federal Reserve raise the most questions. The Congressional Budget Office, the budget body attached to Congress, forecasts that the federal public debt would jump to 98.2% of US gross domestic product in 2020 (+20 points) and then to 105.6% of GDP in 2022. A debt now largely monetized. By setting itself at the end of August a target of average inflation over time that can be exceeded for as long as necessary, the Federal Reserve has anchored the low level of rates, at the same time as it leaves the risk of one day being overwhelmed by the Inflation – a phenomenon that is currently a fantasy. "The Fed's stimulus has been much greater and its balance sheet expansion the highest among major central banks," Barclays analysts said. Adopting an average inflation target, in a world where other central banks keep a specific target, could lead to structural weakness in the dollar by allowing for excess inflation and a relative decline in real rates. »

heavyweight

Most economists expect a further weakening of the greenback, like the panelists interviewed every month by L'Agefi Quotidien. In the short term, some of them still point to its potential for stabilization. "There have been a series of bad U.S. statistics, due to a rise in virus infections during the deconfinement at the beginning of the summer, but this trend should be reversed, as the number of infections now increases significantly outside the United States and decreases sharply at home," says Ben Randol, fx strategist at Bank of America. At HSBC, Paul Mackel even disputes the idea of a link between the performance of economies and currency developments in recent months, pointing out that indicators of economic surprise have been better across the Atlantic than in Europe. "Given the volatility of economic indicators, financial markets have apparently ignored many of the traditional fundamentals, and have let the trading community build speculative positions to extreme degrees," says hsbc's fx strategist. with high short positions on the dollar that will have to be absorbed. In the medium term, the factors mentioned – monetary expansion, credibility of fiscal policy, growth of external debt – would continue to weigh. From there to the fact that the currency falls off its pedestal, there is a step that many refuse to take. US Treasuries remain the safe and liquid asset par excellence, and the dollar accounts for 62% of the world's foreign exchange reserves, a supremacy that neither the euro nor the yuan are about to challenge. The February-March rush to the greenback, in panicked markets, is there to prove it.