Threat to US Dollar Comes From Within. Forecast as of 03.12.2024

2024.12.032024.12.03
Threat to US Dollar Comes From Within. Forecast as of 03.12.2024

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

Donald Trump’s recent threats against BRICS were a blank shot as this move barely supported the US dollar. However, the ongoing political crisis in France represents another crucial factor. Let’s discuss these topics and make a trading plan for the EURUSD pair.

Major Takeaways

• The French government faces a vote of no confidence.
• The US dollar’s dominance is not threatened.
• The Fed is likely to cut rates in December.
• The EURUSD pair may slide lower if it breaches the 1.047 level.

Weekly US Dollar Fundamental Forecast

France’s preference for chaos over order is reflected in the continued decline of the EURUSD. The national rally has joined forces with the left in parliament to pass a vote of no confidence in Michel Barnier’s government, despite the latter’s concessions to Marine Le Pen. The yield differential between French and German bonds, a key indicator of political risk in Europe, has reached its highest point since the 2012 debt crisis and may exceed 100 bps, exerting significant pressure on the euro.

Spread Between French and German Bond Yields

Source: Wall Street Journal.

The EURUSD pair has recently begun to recover, particularly in light of the Trump trade retreat and the diminished probability of a robust ECB monetary policy easing in December. Investors are liquidating positions after Trump’s victory in the November election, given doubts about the feasibility of implementing the candidate’s proposed policies. Furthermore, many of Donald Trump’s proposals are open to question. It appears that he is attempting to exert pressure on Canada and Mexico to concede to the United States demands. The recent threats against the BRICS are seen as perplexing.

The dominance of the US dollar is not expected to be challenged in the coming decades. It is in America’s best interest to ensure the stability of the greenback-based currency system. Over 80% of foreign exchange conversions and 47% of payments are conducted with the greenback. The US dollar accounts for over 60% of the total value of foreign exchange reserves. One of the most widely used alternative payment systems, China’s CIPC, still relies on SWIFT to conduct most of its transactions. The focus of the discussions at the recent BRICS summit was on facilitating cross-border transactions rather than on the creation of a new currency.

President Trump’s proposal for a 100% tariff on imports is not a viable action plan. The threat to the US dollar’s status as the dominant global currency comes from within, not from external factors. UBS identifies excessive budget deficits, a weakening rule of law, and economic nationalism as the primary factors driving the flight from the US dollar. Nevertheless, this process will take more than a decade. Meanwhile, EURUSD bears maintain control of the market.

Share of US Dollar and Other Currencies in Central Banks’ Reserves

Source: Wall Street Journal.

With the recent shift away from the Trump trade, investors are turning their attention back to central banks’ monetary policies. The likelihood of a 25bp cut in the federal funds rate in December, from 63% to 76%, is restraining US dollar bulls. FOMC official Christopher Waller is inclined towards such a move, given his view that the Fed’s monetary policy remains excessively accommodative, which is impeding the growth of the US economy.

Weekly EURUSD Trading Plan

The market will closely scrutinize Jerome Powell’s comments and the release of US employment data for November. Meanwhile, if the EURUSD pair fails to remain above the support level of 1.047, traders may open short trades, adding them to the ones initiated on the growth to 1.06.

Price chart of EURUSD in real time mode