USD: Fundamental supports for the dollar have been eroded – CitiBank

In their weekly strategy report, analysts at Citibank, consider that the Federal Reserve’s uber-loose policy of QE, lower for longer rates and average inflation targeting is indicative of a lower USD over time. Regarding US elections, they see a Trump victory with the potential to derail the recovery in global trade and would likely be detrimental to the euro; whilst a Biden victory would be supportive for currencies that are strategic allies such as Europe, Japan and Emerging Markets and negative for the dollar. 

Key Quotes:

“Regardless of who wins the November election, fundamental supports for the USD have been eroded since the onset of the COVID-crisis and are unlikely to reverse over the medium term. The Fed’s uber-loose policy of QE and lower for longer rates and average inflation targeting is indicative of a lower USD over time. Meanwhile, US federal deficits are rapidly expanding at a time, which may also unfavor USD.”

“There is a risk of a USD rally in the days around the election, particularly in the event of a contested result. This tail risk could lead to significant political and societal unrest, and cause a negative shock to risk assets and a USD rally.”