The US dollar’s recent pullback has largely been driven by a combination of extreme monetary & fiscal intervention, waning coronavirus concerns, and increased risk appetite (evident in the performance of risk assets and emerging market currencies). In the short-to-medium term, there are still several potential tailwinds for the greenback, and the risk for further upside should not be taken lightly. However, looking out longer term, there are significant secular and structural headwinds that point to a weaker USD, which provides its own set of consequences for global markets and asset prices.
For starters, the US dollar was already trending higher heading into 2020 as strong demand for US assets continued to drive both equities and Treasuries to new heights. As the severity of the coronavirus outbreak became more clear, so too did investors’ demand for safe haven assets, exacerbating a dollar funding squeeze that forced the Fed to open up temporary US dollar liquidity arrangements wi