The US currency was under pressure amid the increased risk appetite last week. The US Dollar index (DXY) has lost about 1% over the past five days and dropped to 98.94. A surge in market optimism was the reaction of traders to the news about the beginning of clinical trials of drugs to prevent the coronavirus infection.
The American biotechnology firm Novavax announced that is was set to start the human clinical trial of the drug. The first phase of the trial will be carried out in Melbourne and Brisbane, Australia. During this first phase, Novavax plans to test the safety and effectiveness of the vaccine, injecting more than 100 volunteers.
Since the test results will be announced only in July, we believe that the current rally of risky assets is unlikely to last long. Market participants will soon turn their attention to the consequences of the global economic recession, the likelihood of a second wave of the outbreak, as well as the growing trade tensions between the US and China.
According to experts, quarantine measures enforced by the countries in an attempt to contain the spread of the pandemic caused irreparable damage to global economic activity. Every month of isolation the GDP in 2020 is estimated to reduce by about 2.5%.
It’s also worth noting that the damage is distributed unevenly: countries that were under more stringent restrictions in the 1st quarter, such as France and Italy, showed a stronger drop in GDP in the 1st quarter than the USA, Great Britain and Germany, which implemented the quarantine regime later. In other words, the real scale of the global recession will come to light when data on the global GDP Q2 2020 is released.
Considering that most countries are expected to register a 20-40% decline in the second quarter, the global economy is facing a serious downturn which is likely to last through the end of 2020. Revised OECD Economic Outlook will be presented on June 10. Earlier in May, the UN announced that the global economy was projected to contract by 3.2% amid the 5% slowdown in the economic activity of developed countries and a 0.7% decline in the output of developing countries.
Looks like the second quarter is going to be a losing battle for the US economy. According to Goldman Sachs research economists, US GDP growth will slip to -34% yoy in the second quarter of 2020, while the unemployment rate will rise to 15% by the middle of the year.
This scenario is quite real, despite the Fed and the US government attempts to mitigate the effects of the pandemic. And although U.S. authorities are making quite a progress in slowing the pace of USD growth, the demand for the greenback will continue to dominate the market, at least until the health crisis caused by Covid-19 passes its peak. Given the above, the DXY is likely to keep rising.
Interest in the US dollar as a safe-haven asset can reverse and start growing on the back of trade tensions between Beijing and Washington. Last weekend, violent protests have flared up in Hong Kong after Beijing said it would impose a national security law, which received strong condemnation from the United States.
Investors fear that the current crisis in relations between the two countries will erase all the progress achieved earlier within the framework of trade negotiations, and will slow down the global economic recovery after the COVID-19 pandemic.
Based on the above-mentioned factors, we can assume that global markets will probably face yet another wave of risk version in the very near future. This will make the dollar a highly liquid asset, that will receive additional support against the backdrop of greater demand for safe havens. With that said, the US Dollar index (DXY) has all reasons to resume its growth and consolidate above 100.00.
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