LONDON: The dollar was set to end 2020 around 2-1/2 year lows on Thursday, allowing currencies from the euro to Chinese yuan to strengthen, while holiday-thinned euro zone bond yields were mostly steady after dropping 30-100 basis points over the year.
The prospect of a brighter 2021 has lessened the lure of the safe-haven dollar, while burnishing the attraction of assets overseas, especially in emerging markets.
News that UK companies would be allowed another three-month transition period for swaps trading on EU platforms, averting the threat of disruptions next week, pressured the greenback further by sending sterling to a new May 2018 high
This week’s data also showed the US trade account haemorrhaging dollars as the goods deficit hit a record $84.8 billion in November. The current account gap too widened to a 12-year high in the third quarter.
“I expect the dollar to depreciate further over the next few years as the Fed keeps rates at zero whilst maintaining its bloated balance sheet,” Kevin Boscher, chief investment officer at asset manager Ravenscroft told clients.
“The magnitude of the twin-deficits dwarfs any other major economy,” he noted.
Against a currency basket, the dollar is around 89.56, just off April 2018 lows of 89.515 for a 2020 loss of 7.2%. A fall past 88.25 will take it all the way to 2014 troughs.
The greenback’s weakness boosted the euro above $1.23, the highest since April 2018, with a gain of almost 10% for the year.
Against the yuan, the dollar breached 6.4900 for the first time since mid-2018, though Chinese banks were later reported to be buying dollars to limit the drop.
Sterling rose as far as $1.3686, while against the euro it rallied 0.6% to a high of 89.76 pence.
On sovereign bonds, borrowing costs inched lower in thin liquidity, with this year’s top performer, Italy, seeing 10-year yields slip one basis point to around 0.51%.
They started the year at almost 1.5%, only to drop steadily after the ECB’s stimulus explosion in response to the Covid-19 pandemic.
Spanish and Portuguese 10-year yields hovered above 0%, down some 50 bps on the year. Even German yields, already negative back in January, fell around 30 bps.
After bumper 2020 returns - 4%-5% on 10-year German, Spanish and Portuguese debt, and over 8% on their Italian and US equivalents - yields could grind gradually higher next year. Yet the improving growth picture should be broadly offset by central bank buying.
“Financial repression is very much intact and bond yields will be kept low across the maturity range in order to force investors further up the risk scale in a search for yield,” Boscher added.
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