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#1 23-12-2020 11:41:47

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: 3 reasons why the USD will keep falling next year

EUR/USD: 3 reasons why the USD will keep falling next year


The USD had a hectic day on Monday - it soared in the market's opening hours, before handing back its gains towards the end of the North American session.

For bulls, Monday was as tough as it could have been, as the reversal was abrupt, with little or no retreat. For example, the EUR/USD fell from 1.2250 to 1.2130, then rose back to its initial level. The same thing happened to the AUD/USD and GBP/USD - roughly speaking, the dollar ended the day more or less stable.

With so many sellers of the global reserve currency, let's look at the most popular reasons why the dollar is expected to continue to decline in 2021.

The new president's administration

The long-awaited change in the U.S. administration could add fuel to the fire regarding the falling USD. The market is expecting further fiscal stimulus in the form of an infrastructure bill in excess of $1 trillion.

The Fed's change in strategy

Of the three reasons, it is the one that has the strongest impact on the USD. The Fed's move to an average inflation target was highlighted last week at the press conference following the December meeting. The Fed is willing to let inflation rise.

The pace of the quantitative easing programme, $120 billion per month, suggests that this will be the case. The only difference from the traditional 2% inflation-targeting framework is the Fed's willingness to respond. In fact, it is the expected lack of action that could push the dollar even lower next year.

Targeting average inflation means that the Fed will not raise the federal funds rate or reduce the quantitative easing programme until there is strong evidence that average inflation is above 2%. The big unknown comes from the period the Fed is going to consider - how many years back will the Fed go to achieve average inflation of 2%?

Vaccines

Strong growth in economic activity is expected if the virus vaccines do their job. More than 495,000 people have already received their first vaccine in the UK - so this is the beginning.

A strong recovery means a falling dollar as funds flow to emerging markets and other places seeking higher returns.

Will these three themes dominate next year? Or will the dollar make a strong comeback, given that the story explained in this article represents the general consensus of the market?

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