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Dollar Declines: What Awaits the Currency ETFs in 2021?

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This has been a rough year for the greenback on an overall basis with Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) losing about 5.4% so far. The start of the year was bullish for the reserve currency as acute demand for cash amid the coronavirus crisis boosted the greenback’s safe-haven appeal.

However, a super-dovish Fed first marred the demand for the dollar and several other factors played roles later in pulling down the currency’s value. As a result, the dollar index touched its lowest in more than two years on Dec 3.

Asset managers have increased their short bets on the U.S. dollar to record levels. The dollar has declined against the major peer currencies in seven of the first 11 months of the year, according to the Bloomberg Dollar Spot Index. In fact, it underperformed the two other safe-haven counterparts Swiss Franc and Yen.

Against this backdrop, below we highlight what’s waiting for the dollar and other currency ETFs in 2021.

Dollar in 2021

More Vaccine News in the Making?

We expect the U.S. dollar to remain under pressure in the beginning of 2021 when more vaccine updates from various pharma companies will likely be assessed. Global stocks were super steady in November on back-to-back upbeat vaccine update from pharma companies like Pfizer, Moderna and AstraZeneca. This raised hopes of a return to normalcy sooner than expected. Plus, Sanofi (SNY), GlaxoSmithKline's (GSK) and Johnson & Johnson (JNJ) are also working hard in the COVID-19 vaccine field and may come up with good news next year.

“A smooth vaccine roll-out soon can potentially be a game changer, ” said Christopher Wong, senior foreign-exchange strategist at Malayan Banking Bhd, (as quoted on Bloomberg) as it may boost recovery hopes and prolong dollar weakness.

U.S. Stimulus in 2021?

Lawmakers in Washington initially failed to reach an agreement on the extension of economic stimulus to fight the COVID-19 crisis, but there has been a $908 billion bipartisan proposal lately, which means we are likely to see some sort of stimulus by early 2021. It means further risk-on sentiments and a downside in the safe-haven currency dollar.

Dollar to Weaken in Biden Presidency?

A Biden administration is deemed (by many analysts like Citi Private Bank strategists) to cut off uncertainty in international trade policy as well as special trade tensions with China. Before the election, many analysts believed that higher taxes and a relatively tepid Wall Street (due to Biden’s intention to hike tax rate) could result in weakness in the greenback if Biden wins. However, a divided Congress will not make the case for a tax hike easy. Still, some sort of weakness in the dollar is expected ahead (read: What Lies Ahead of Global Currency ETFs If Biden Wins?).

China to Spearhead Global Growth in 2021?

The Chinese yuan has lately been gaining credibility as a safe haven from volatility. Lack of trade tensions under Biden’s presidency should benefit Chinese Yuan. Recently, OECD said that upcoming economic recovery would vary across the countries. The agency also added that China is expected to make up more than one-third of global growth in 2021.

The OECD said it expects China, where recovery rate has been faster than its peers, to log growth of 1.8% this year. This would make China the only key economy to post economic growth in 2020, as quoted on CNBC. WisdomTree Chinese Yuan Fund (CYB - Free Report) is thus in a sweet spot now.

Which Other Currencies Will Rule in 2021?

“Procyclical-proxy currencies including the Aussie, kiwi in developed market space and won in Asia excluding Japan can benefit while the dollar remains on the backfoot,” per the senior foreign-exchange strategist at Malayan Banking Bhd, as quoted on Bloomberg. This puts the spotlight on Invesco CurrencyShares Australian Dollar Trust (FXA - Free Report) .

Per the Bloomberg article, “Credit Suisse Group AG is forecasting 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.”

Euro has been gaining in recent months after European Union leaders agreed on a massive stimulus plan (worth 750 billion euros) for their coronavirus-shattered economies. Chances of more easing from the ECB may also promote further economic activity in the Euro zone and boost the common currency. So, Euro Trust Currencyshares Invesco (FXE - Free Report) is also up for gains.

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