Is the US dollar overvalued?

Norbert Hagen on currencies

After the US presidential election, the news related to Covid-19 dominated the financial markets again. There are both negative and positive developments here. In Europe and the USA, the number of new corona infections continues to be (too) high.

In Switzerland, all intensive care beds in hospitals are already occupied. Against this background, the various governments are again imposing lockdown measures and thus partially shutting down the economy again.

Investors, on the other hand, tend to focus more on the good news. There are encouraging signals from the healthcare industry. Both the German company Biontech and the American competitor Moderna are apparently on the verge of breakthrough with a vaccine against the Sars-CoV-2 virus.

Astrazeneca also reports positive test results. A market launch seems to be only a matter of time; it may start this year. More vaccine candidates are likely to follow soon. The return to normal is slowly becoming a real option.

This creates a good mood, especially on the stock markets. The American S&P 500 is trading at a record level. Cyclical stocks in particular have done well recently. The bond markets are also reacting with satisfaction and are driving up the prices of high-risk junk bonds in particular. The spreads of these riskier bonds have narrowed to levels last seen in May 2019.

Dollars under pressure

There are interesting developments in the currency markets. The US Federal Reserve's dollar index, for example, fell to its lowest level in 19 months. In all probability it will not stay that way. There will be further easing of the central bank in Euroland. In the euro zone, for example, prices fell by 0.3 percent in September. This increases the pressure on the ECB to take further countermeasures. ECB boss Christine Lagarde has already spoken in this direction.

In the United States, on the other hand, politics seems to be stalled, at least for the coming weeks. More QE in Europe and a temporary stalemate in monetary policy in the US would certainly have a negative impact on the euro in the short term, which has its next support line at an exchange rate of 1.15 US dollars.