Dollar problems, deflation in Europe and recovery in Germany

2 Sep 2020

Most of the Tuesday dollar was under the pressure, having already lost more than 10% from the March highs. Powell's speech last Thursday was essentially a declaration that ultra-soft monetary policy in the United States will last for a long time. Which, in turn, is an exclusively bearish signal for the dollar.

So yesterday's walk of the Dollar Index below 92 can be considered logical and rational. At the same time, its further prospects look extremely gloomy: difficult situation with the pandemic, riots and all those BLM issues, the lack of a new stimulus program, uncertainty with the results of the presidential elections, the failure of the economy in the second quarter and the unclear pace of its recovery in the foreseeable future are only a small part of the dollar's problems.

This weakness in the dollar, in turn, partially explains why gold is near $2000 and why the US stock market makes new all-time highs every day. By the way this August was the best for the SP500 since 1986 (!).

The first deflation in the last 4 years was recorded in the Eurozone. Considering that the GDP of the Eurozone in the second quarter decreased by more than 10%, this signal is rather pessimistic, indicating a potential transition of the recession into an economic depression.

Nevertheless, euro yesterday came close to the level of 1.20 paired with the dollar. The reason for this was both the general weakness of the dollar and the statements from the German Government that by the end of 2020 the country's GDP will decrease not by 6.3%, as was expected earlier, but "only" by 5.8%. Although the word "only" is hardly appropriate to describe this situation. At the same time, a return to the pre-pandemic level is expected no earlier than 2022.