Dollar Strength to Continue in the Second Half of the Year

[Asia Economy Reporter Song Hwajeong] The dollar, which showed strength in the first half of this year due to a preference for safe assets amid the spread of the novel coronavirus infection (COVID-19), is expected to continue its strength in the second half of the year.

NH Investment & Securities forecasted that the pressure for dollar strength will continue in the second half amid the global economic downturn. Ahn Kwonamin, a researcher at NH Investment & Securities, said, "According to the 'Dollar Smile' theory, the dollar strengthens when only the U.S. economy is doing well or when the global economy is sluggish," adding, "This year, the global economy is expected to experience negative growth, and since it has had a direct impact on the real economy, it is difficult for major countries' economies to recover quickly. During times like now, when demand is weak and deflation is a concern, a decline in U.S. expected inflation and dollar strength are anticipated."

In particular, the economic downturn in Europe is analyzed as a factor for dollar strength. Researcher Kwon explained, "The euro accounts for 58% of the dollar index," and "The decline in the euro's value due to Europe's economic downturn directly leads to dollar strength." Considering the high proportion of tourism and other factors, the impact of COVID-19 on Europe is greater than on the U.S., but Europe's response policies lag behind those of the U.S., and major economic indicators also show Europe at a disadvantage. Researcher Kwon said, "Due to the fiscal soundness of vulnerable Eurozone countries and policy discord, a meaningful euro rebound is unlikely."

Additionally, the high likelihood of continued demand for cash holdings is another reason why dollar strength is expected. At the beginning of the year, due to COVID-19, U.S. companies' cash and cash equivalents surged in the first quarter. Researcher Kwon said, "Although there is an ever-present expectation for the resumption of economic activities, companies' demand for cash will continue amid the still sluggish macro environment," adding, "Concerns about the reduction of U.S. companies' cash assets due to COVID-19 in the first quarter were prominent, and the continued demand for companies to secure cash (dollars) is a factor supporting pressure for dollar strength."