Why is the dollar falling, will the depreciation continue?

The dollar has been in a steady downward trend in global markets since March 2020, when the Covid-19 outbreak hit the USA.

The dollar, which depreciated between 10 and 12 percent relative to the currencies of the US trading partners, saw the lowest levels since 2018.

The USD / TL rate was also affected by this decline. While the USD / TL rate has regressed for the last 3 days, it is testing the lowest level since August. The Dollar / TL exchange rate, which is traded at 7.05 today, saw 8.58 in November 2020.

In his analysis on the course of the dollar in Bloomberg, economist Stephen Roach reiterates his prediction that the dollar’s decline in global markets will be around 35 percent by the end of 2021, recalling his forecast in June.

“We are just in the third hit of a nine-shot baseball game,” says Roach, saying that if this prediction is correct, the drop in the dollar will be an important warning that will mark the 46th US President Joe Biden’s first year.

According to Roach, three factors stand out in the fall of the dollar in global markets:

The increase in the current account deficit of the USA

The rise of the euro

Limited steps can be taken by the Federal Reserve against the weakness of the dollar

In light of these factors, Roach says he is “more confident” about his predictions that the dollar will continue to decline.

The current account deficit offers the most comprehensive assessment of the trade as it also includes investment income. The ratio of current account deficit to gross domestic product (GDP) in the USA increased by 1.2 points in the second quarter of 2020 and was recorded as 3.3 percent. This rate was calculated as 3.4 percent in the third quarter.

The country’s current account deficit increased by 10.6 percent in the third quarter of 2020 compared to the previous quarter, reaching $ 178.5 billion.

While the increase in the second quarter is recorded as the biggest rate ever, the current position of the current account deficit represents the worst level since 2008.

The increasing budget deficit associated with Covid is also the main reason for the deterioration in domestic savings.

The expansion in the current account deficit in 2020 was the corollary of the $ 2.2 trillion CARES law, which aimed to provide financial support during Covid restrictions. CARES is used as an abbreviation for the coronavirus aid, support and economic security law and entered into force on March 27, 2020, signed by the then US President Donald Trump.

As the epidemic and its impact continue, a $ 2.8 trillion financial support package will be added to it. $ 900 billion of this came into play in December, with $ 1.9 trillion offered by Biden.

Covid support packages will reach $ 5 trillion in total. This corresponds to 24 percent of 2020’s gross domestic product. The widening in the current account deficit may also be affected by this, above its previous level.

Economist Stephen Roach points out that the backlash to his negative prediction about the dollar focused on “there is no other alternative” and objects to this. He cites the national currency of China, the yuan and the euro, and even precious metals and cryptocurrencies.

Since June 2020, China has pioneered post-Covid recovery worldwide, adding value to its currency. The euro also saw an increase of 7 percent between February and May in 2020.

An important factor was the agreement between German Chancellor Angela Merkel and French President Emmanuel Macron in July 2020 on the 750 billion euro rescue fund.

On the other hand, gold prices also rose in the summer of 2020 in relation to the bailout packages in the US and EU. Increasing liquidity was effective in the increase in gold prices.

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