Dollar Bears Vindicated by Landmark Week as Drop Accelerates

(Bloomberg) -- It’s turning into a week of vindication for proponents of a weaker dollar as the case they’ve been making for years may be gaining steam.

The greenback is spiraling lower, probing levels last seen in April 2018, judging by a Bloomberg index. The tumble is part of a broader move across financial markets to price in brighter growth prospects for 2021 and the potential for superior investment opportunities outside the U.S., in large part as hopes for a coronavirus vaccine build.

Dollar bears are feeling encouraged by the breadth of the currency’s declines this week: The euro, the Australian and Canadian dollars and the Korean won have all touched their highest levels in more than two years, while the Swiss franc is at its strongest since 2015. The pound hit the highest in roughly a year Thursday, although it pared gains on conflicting reports surrounding Brexit.

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“We are seeing money being put back to work after the defensive positions held in the dollar,” said Chris Turner, a currency strategist at ING Groep NV. “Vaccine news is adding weight to the view of a synchronized global upturn in 2021; the dollar can fall another 5-10% next year.”

More weakness in the greenback may come as asset managers build record short bets. The Congress’s renewed focus on fiscal stimulus in recent days delivered the latest blow to the dollar. In another sign of how investors are increasingly bullish on the outlook for economic growth and vaccine development, U.S. stocks are at record highs and commodities are rising.

It all adds credence to those on Wall Street who are warning that the greenback will undergo a bearish cycle with the Federal Reserve keeping rates low for years.

The dollar has dropped about 13% since peaking in March. It’s down 8% against the Swiss franc and roughly 4% versus the yen in 2020, two other traditional haven currencies, underlining the impact of the Fed’s unprecedented stimulus.

Here are key levels breached this week:

• Sterling touched $1.3500, pushing beyond a high touched in early September to reach the strongest since December 2019
• The euro has broken through the psychological level of $1.20. It touched $1.2175 on Thursday, its strongest since April 2018
• The Canadian dollar strengthened to C$1.2852, the strongest since October 2018
• The Australian dollar rose to 74.50 U.S. cents, its highest level in more than two years
• The Swiss franc soared to its highest since January 2015
• The risk-sensitive Korean won strengthened to 1096.15 against the dollar, its strongest since June 2018, after breaking the key 1,100 level

Credit Suisse Group AG forecasts that the euro may rise to $1.25 by the end of 2021, while Goldman Sachs Asset Management favors shorting the dollar against the yuan and sees further gains in the euro and yen. Morgan Stanley and Citigroup Inc. have also forecast a weaker greenback.

“Risk-on sentiment seemed to catch another leg higher this week -- we think this should accelerate the dollar’s tilt lower in the near term,” said Terence Wu, foreign-exchange strategist at Oversea-Chinese Banking Corp. in Singapore. “This round of dollar weakness is still more focused in the G-10 space,” although “we expect USD-Asia downside to open up in time.”

©2020 Bloomberg L.P.