The U.S. dollar sell-off reignites (Daily analysis 7.01.2020)

The US dollar faces new headwinds from the Georgia Senate Democratic victories. Securing majorities in both the House and the Senate heavily influences Joe Biden’s chances to fulfil his extensive legislative ambitions and hurts the US dollar.

The greenback’s weakness prevails. The EUR/USD pair jumped above the 1.23 handle for the first time since spring 2018. The USD/JPY exchange rate dropped lower to trade as low as 102.60. The probability of the Bank of Japan stepping in to tame the Yen’s advance becomes an even more pressing issue. Despite the US dollar weakness, the GBP/USD pair has failed to breach the 1.27 mark. The pound sterling is hit by a prospect of the extension of the national lockdown until late February.

Political developments bode ill for the greenback

Democrats secured a full sweep after all, which points to a bolder than anticipated fiscal expansion and stronger inflationary pressures ahead. The latter will result in even lower real yields and as a consequence, make the US dollar even less attractive. In the long term, the stock of US debt combined with a substantial current account deficit might lead to a significant dollar’s weakness. It may turn out that this is the only way to ensure the sustainability of so-called twin-deficits. In the shortest term, the focus remains on the rising probability of boosting the USD900bn fiscal package agreed in December. Consequently, risk appetite remains supported despite the prospects of higher taxes and the chaos created by the Capitol Hill storming and social unrest in the United States.