Economic uncertainties related to the Covid-19 pandemic have weighed on the dollar, which fell to its lowest level in two years. The scenario caused hedge funds to become bearish. In other words, investors expect the U.S. currency to devalue even further.
The impasse in the U.S. Congress over the release of more stimulus to the economy contributes to worsen the scenario. These uncertainties have weighed on the exchange rate since July. The dollar peaked in March, but has since fallen as the effects of the virus were reflected in the economy.
Starting in July, the Dollar Index (which tracks the dollar’s price against a basket of currencies) has fluctuated near its lowest levels in two years, Reuters reports. And this August, the index fell to its lowest level since May 2018, after a five-day string of declines, as also reported by Business Insider.
“In the long run, we see a weak dollar as U.S. debt grows, and the global recovery gains momentum. In the short term, the dollar can strengthen with uncertainty during the flu season”, said Eric Bright, managing director of Bel Air Investment Advisors, to Business Insider. The executive referred to the coldest period of the year in the Northern Hemisphere, when the flu is more recurrent.
On the other hand, the market believes that the pandemic can be beneficial for cryptocurrencies.
Dollar at lowest level in two years because it ‘seemed overvalued’
And if the market is correct, the fall in the dollar will be even stronger. That’s because hedge funds — funds that tend to adopt bolder investment strategies — have become bearish against the U.S. currency. This indicates that they expect further devaluation. According to Bloomberg News, this is the first time this has happened since 2018.
The news agency mentioned data from the Commodity Futures Trading Commission that indicates a fall in certain foreign exchange contracts to focus on bets on the euro. The single European currency is seen as having an uptrend.
Yujiro Goto, head of foreign exchange strategy at Nomura Holdings, explained to Bloomberg that the fall in the dollar is a reversal from the March trigger. “Especially because the currency seemed overvalued”, he added.
Transfero’s investment thesis predicts a fall in the dollar in the coming years and that cryptoassets can act as a protection against these falls.