Dollar on borrowed time as US twin deficits balloon

Sydney

THE US dollar was ending 2020 in a downward spiral on Thursday with investors wagering a global economic recovery will suck money into riskier assets, even as the United States has to borrow ever more to fund its swelling twin deficits.

The euro stood at US$1.2291, having hit its highest since April 2018 with a gain of almost 10 per cent for the year. The next stops for the bull train are US$1.2413 and US$1.2476, on the way to the 2018 peak at US$1.2555.

The US dollar was lying at 103.15 yen, but managed to hold above the December low of 102.86.

It also fell against the Chinese yuan, breaching 6.4900 for the first time since mid-2018, though Chinese banks were later reported to be buying US dollars to limit the drop.

Sterling held gains after lawmakers approved a post-Brexit trade deal with the European Union, stretching as far as US$1.3641, a level unseen since May 2018.

Against a basket of currencies, the US dollar had sunk to 89.643, having touched its lowest since April 2018. That left it down 7.2 per cent on the year, and no less than 13 per cent on the 102.99 peak hit during the market mayhem of mid-March.

The next target is 89.277 and then 88.251, which was the absolute low in 2018.

The prospect of a brighter 2021 has lessened the need for the safe-haven US dollar, while burnishing the attraction of riskier assets especially in emerging markets.

Bears have also resurrected the "twin deficits" excuse for shorting the US dollar - that the explosion in the budget and trade deficits means more US dollars being printed and moved abroad.

From this perspective, the new US stimulus bill is US dollar negative as it adds to the nation's debt, and US President-elect Joe Biden is promising a lot more next year.

The country is also haemorrhaging US dollars on its trade account where the deficit on goods hit a record US$84.8 billion in November, as imports surged past pre-pandemic levels.

Likewise, the current account deficit widened to a 12-year high in the third quarter and there was a large shortfall in net financial transactions as Americans borrowed more from abroad.

In contrast, the EU runs a huge current account surplus, largely thanks to Germany, so there is a natural inflow to euros through trade. REUTERS