Analyst Insights, Friday, 17th of July, 2020
The EURUSD pair seems to be the talk of the town lately because it keeps going up despite pundits being bearish for the Euro for some time now.
Please note the EUROZONE has a chronic 5% current account surplus. Also, the political integration of Europe, while still far away, will eventually happen.
But as for the dollar, very few noticed that the Fed offered swap liquidity and there were very few takers. And as I have said before, I think eventually the US will also have negative yields. When this happens, the EURO should appreciate vs the dollar by a lot, for there would be very few reasons to buy US government securities to receive the yield they offer today (which is almost zero anyway).
But the important question is, what might a lower dollar mean for equities and markets in general? The answer is that a lower dollar is supportive for the global economy and equities, but also supportive for US markets.
About 50% of the profits of the companies that compose the S&P 500 index come from outside the US. So, a lower dollar means higher profits in dollars, when one converts those profits from the local currency.
Also, the lower the dollar, the easier for companies to repay their dollar debts outside the US. This gives the EM space and many countries a lot of breathing space.
The bottom line is that the lower dollar is good news for equities and the world economy. And to the extent that the dollar continues lower, it means support for equity markets both in the US and internationally. In short, a lower dollar is a win-win for everyone.
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