US dollar collapse is imminent, - Die Welt

Author : Frank Stocker

Source : Die Welt

The high budget deficit will push the US trade deficit wider, experts predict
13:32, 26 January 2021

Open source

Donald Trump’s rule is in the past, at least in the US president’s office. His successor, Joe Biden, is not only the complete opposite, personally and politically. Many are also pinning their hopes on him in the area of ​​economic policy, which will give the United States new power.

But in one area, virtually all economists now expect the opposite — it is about the SU dollar. They predict a downward trend, primarily due to Biden's economic and political plans. Economist Stephen Roach even predicts a dollar collapse.

Werner Krämer, an economist at the Lazard Asset Management consulting company, shares a similar opinion. "The American crisis, the rise of the US and the weakness of the US dollar in recent months at a sensational level," says Krämer. "This could lead to a real currency crisis in the worst-case scenario."

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But even if it doesn't come to that, a significantly weakened dollar will have significant consequences for Europe, depositors, and investors in the country.

Joe Biden plans to implement the so-called "America's Salvation Plan" as one of the first measures as the new US president. To the already approved in December lump-sum payments to Americans in the amount of $ 600, another $ 1,400 will be added, unemployment benefits will increase not by $ 300, as previously planned, but by $ 400.

In addition, hundreds of billions of dollars are earmarked in support of states, communities, and schools, as well as investments in infrastructure, research, and clean energy. The total volume of the package is $ 1.9 trillion, which corresponds to about 9% of the productivity of the US economy. At the same time, the December aid package amounted to $ 3.4 trillion.

As a result, economists are one by one raising their forecasts for US growth - after all, of course, trillions will spur the economy. But at the same time, debts will go uphill.

And without the additional spending on America's Bailout Plan, US debt this year would presumably be about 134% of GDP - the figure Italy had before the crisis. But it will be even higher.

Last year, the budget deficit already reached an incredible 15% of GDP. It was assumed that this year it will fall to below 10%, but now an economist at Commerzbank Joerg Kraemer assumes that this year it will remain at the same level if the plans are implemented. Then the total debt will be about 140% of GDP.

This will entail consequences. The high budget deficit will push the US trade deficit wider, Roach fears, and when combined with the Federal Reserve's policy of keeping the printing press on and off, will cause the dollar to fall. "Over the course of this year, I see further 15-20% downside potential in the Broad Dollar Index," Roach predicted.

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It measures the dollar against a basket of currencies from major US trading partners. The dollar has grown sharply since the beginning of the coronavirus crisis – investors then rushed to this currency, which, as before, is considered a safe haven.

Then the dollar was overvalued by 20%, says Zach Pundle of Goldman Sachs. Since that time, the American currency has dropped significantly again, but, according to the expert, it is still overvalued by 8-10%. "Therefore, the movements can be much stronger."

True, this would not mean a collapse, and Holger Schmieding, the chief economist at Berenberg Bank, agrees with this opinion. "For now," he said, even some growth of the American currency is possible. “So the market program as such is rather positive for the dollar,” he said.

Because when the American economy recovers, inflation expectations will rise, and this, in turn, will lead to higher interest rates. Because of this, more capital will come to the country, and this will support the dollar. He, of course, also grew a little when it became clear that the American Democrats would have a majority in both houses of parliament, and it would be easier for Joe Biden to implement his initiatives.

"However, this environment is improving around the world," Schmieding said. And this will lead, according to him, to the fact that money will go from "safe havens" and, first of all, from the United States. Therefore, in the medium term, the expert also expects a serious weakening of the dollar and predicts its rate for the coming months at $ 1.28 per euro. Most economists are of the same opinion.

On the one hand, this will have implications for the European economy: exports to the United States will become more expensive. But both savers and investors should tune in to some changes. Indeed, in the capital market, a weak dollar will also lead to shifts.

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Olivier de Berranger, head of research at the stock company LFDE, believes cyclical stocks will benefit most from this. He is referring to companies that are particularly hard hit by a downturn but tend to do particularly well at the start of a business cycle.

The same applies to the so-called "value stocks," that is, the securities of companies with a stable and stable business, which do not have large jumps in trading volumes, as, for example, in technology stocks. But on the other hand, these shares are very reliable as an investment instrument.

"The stocks of developing countries, for which the growth in the American market, run second, the growing deficit in America and the depreciation of the dollar can play a positive role," de Berranger said.

Precious metals can also benefit from their traditional function of protecting against inflation and growing demand due to economic growth. "In particular, this applies to platinum and palladium, which are assigned a central role in the Joe Biden program in the context of the development of green technologies," the expert added.

Those looking to benefit from the weakening dollar can bet on this trend. Alternatively, investors can of course buy the currency directly, but this will be a rather complicated mechanism. After all, if with a declining dollar exchange rate, you can simply buy dollars, then with a growing exchange rate such a direct investment instrument will not work.

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Therefore, a workaround will be needed in the form of purchasing certificates or options, for example, the so-called "knockout certificates." They increase the amplitude of movement in the foreign exchange market by several times - the more, the more the current rate approaches the barrier "built" in the certificate. In case of serious deviations from this barrier in any direction, the corresponding paper depreciates.

However, investors may well also choose products whose "knockout" threshold is very far. Potential profits will be less, but the risk of losses will not be too great. At the moment, this applies, for example, to the certificate of the bank DZ under the securities number DF585Z. Now it increases the amplitude of movement fivefold and depreciates when the euro reaches 0.99 dollars.

There are hundreds of such securities with a knockout threshold between $ 0.50 per euro and tenths of a cent below the current rate. One might bet on Joe Biden and the dollar. However, as in politics, one must understand here: often success and failure are literally one step apart.

Read the original text at Die Welt.

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