USD Poised for a Nearing Rebound| Influencer Forex Analysis•Jasper Lo

Some investment banks analyzed that the US dollar would decline sharply regardless of the election results because its weak fundamentals are unchangeable. Such an analysis, however, is untenable from my point of view. As different results will lead to different political and fiscal measures, the fundamentals will be affected and changed accordingly.

The tax cuts which Trump signed into law after he took office in 2017 significantly increased federal budget deficits, terminating the dollar's long-enduring bull cycle. The DXY had climbed to a high of 103.77 in July 2017, compared to the low of 72.75 in 2011. The dollar prices slipped from a position of strength amid the Fed's continued tightening of monetary policy, which was pushed by Trump's tax reform. The dollar's plunge shocked a host of analysts at the time, who said, as they do today, that a Trump presidency would not change the fundamentals of the strong dollar.

To get back a little further in history, when Reagan defeated Carter to become president, the country was suffering from a severe recession and hyperinflation, and the dollar prices had dropped to an all-time low. But the currency immediately embraced a bull market breakout after Reagan won in November 1980, rising from 86 to a high of 163.83 in 1985, a historic gain. These examples prove that different administrations will launch different political and fiscal policies, which are important enough to change the dollar's fundamentals. Besides the new president's policies, the following two aspects will also affect the fundamentals.

The first is the comparison in monetary policy between the Fed and other central banks. Whether there is no need for the Fed to adopt more quantitative-easing measures deserves attention as the GDP released last week has indicated a steep economic rally. The Fed not only sees no pressures of taking additional measures but will gradually reduce the debt purchase and then signal the market exit. On the contrary, central banks in Europe, the UK and Australia have a chance to continue the ultra-loose monetary policies, such as applying more QE for economic stimulus, which are bound to push a surged government debt and fiscal deterioration, bringing devaluation pressure on local currencies.

Second, Europe is experiencing a serious pandemic outburst. In response to the situation, Germany, France and Britain have announced second national lockdowns. New restrictions will hit local economies and send lower-than-expected economic data to the EU and the UK. As a result, the euro and the pound are more likely to be under pressure, while the US dollar may receive strong support.