Market Watch: Dollar Could Be a 'Crash Risk' if U.S. Loses 'Credibility,' Analyst Warns

Article by William Watts in Market Watch

The U.S. dollar began August with a healthy bounce after suffering its worst monthly fall in just shy of a decade, but it did little to dissuade bears who are looking for further weakness in the greenback.

“We expect the currency to be undermined by an ebbing of safe-haven flows, a reduction in the U.S. rate advantage, and political uncertainty ahead of the November presidential election,” wrote analysts at UBS, in a note last week.

The U.S. Dollar Index, a measure of the currency against a basket of six major rivals, fell 4% in July, its biggest one-month decline since September 2010, according to FactSet data, trading Friday at its lowest in more than two years.

The index caught a 0.3% bounce on Monday to around 93.599. Data last week from the Commodity Futures Trading Commission, meanwhile, showed that the dollar is well out of favor with speculative traders.

Barrow worried that the combination of rising economic and political uncertainty amid the COVID-19 pandemic and ahead of the November presidential election could pose a “crash risk” — a danger more often associated with emerging-market currencies.

Why the danger? Barrow argued that rate cuts and other easing measures by the Federal Reserve and the drop in Treasury yields to or near all-time lows has significantly reduced the U.S. rate premium versus other “safe” currencies.

There are other factors that could lead to dollar weakness, as well, but the underlying question is, “Can the dollar be trusted?” he said. “For if trust has disappeared in the U.S.’s economy, policy making, election credibility and more, then the dollar could be ... "

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