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#1 31-12-2019 10:30:37

johnedward
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EUR/USD: Will 2020 see a strong decline of the dollar?

EUR/USD: Will 2020 see a strong decline of the dollar?


The strength of the USD has been a sore point for multinationals reporting profits, but this could change this year and the currency could generate some benefits for the stock market.

Wall Street analysts expect the greenback to decline in 2020, and it has already begun to slide, with the dollar index so far falling in the last quarter of 2019 by 2.5% and 1.6% in December. For 2019 as a whole, the dollar index has risen by only about 0.5% and has risen by about 5% in the past 24 months.

For S&P 500 companies, approximately 42 per cent of their revenues come from foreign sales, according to the S&P Dow Jones indices. If the USD weakens, the goods and services sold by these companies become less expensive for foreign customers. This in turn should boost corporate profits and stimulate U.S. exports.

"It's a trade-off," says Mark Chandler, chief strategist at Bannockburn Global FX. "Converting these foreign profits into dollars can be helpful, but if the reason for the dollar's decline is due to the slowdown in the US economy, that will offset the benefit of the conversion. Why is the dollar going down? Because the US economy is converging with the rest of the world, but it will not be as good for the US economy."

"Is it just the bad things in the US? No, it can be good news abroad," Chandler adds. "The big theme has been that the US has been much stronger than Europe and Japan. Perhaps the growth gap is narrowing."

Julian Emanuel, strategist at BTIG, says he does not believe that the dollar's weakness is necessarily due to negative developments in the US. The first phase of the trade agreement with China and a new trade treaty with Canada and Mexico have set other regions of the world to do better economically.

"We are very supportive of the idea of a weak USD. In our view, there are a number of reasons why this could happen. It's mostly the virtuous reason," says Emanuel. "Basically, the rest of the world is catching up to us. Whether it is because of progress on the trade war front or progress on Brexit. Either way, we believe the gap between US economic performance and the rest of the world will narrow."

Emanuel says he expects the dollar to lose about 3-5% in 2020, and that's good for corporate profits.

"What we've said is that a 1% movement in the dollar, when you look at the S&P 500, is likely to cause a 30 basis point change in earnings," he says. "If the dollar moves 3 to 5 percent, you could see a 1 to 1.5% tailwind on S&P 500 earnings."

The election year is likely to be a time when the USD weakens, and it could weaken further if there is uncertainty, such as the rise of a candidate whose policies are unfavourable to business. According to analysts, the market currently believes that President Trump will be re-elected.

"The president has been very, very effective in achieving the market results he had in mind. He wanted a weaker dollar and he certainly wants it in the run-up to the election, because a weaker dollar leads to increased exports, not to mention S&P 500 earnings," says Emanuel. "The less virtuous side of it is that this could be one of those things where the market attributes a greater political risk to the United States compared to the rest of the world, which seems to be getting by on its own."

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