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USD Will Plunge With Vaccine Rollout And Weak Monetary Policy?

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EDITOR NOTE: Citi isn’t the first bank to forecast a 20% drop in the dollar, yet it's one of the first to cite the vaccine rollout as one of its negative drivers, adding to it the loose monetary policy that we all know will plunge the greenback’s value. Gold has pulled back to healthy levels over the last few months, allowing investors to accumulate more of the metal before it resumes its multi-year bull market. As you know, gold often moves inverse to the dollar. When the greenback goes down, the yellow metal tends to go up. So, if you haven’t pulled the trigger yet, now’s a good time to do so, as all economic factors are weighing against certainty, and investors have already begun rotating from risky assets to safety.

The U.S. dollar strength, which has been one of the main obstacles to higher gold prices this fall, is about to reverse, according to Citibank.

Vaccine rollout and loose monetary policy will weigh on the U.S. dollar next year, with the currency at risk of falling 20%, Citi said in a note this week.

"When viable, widely distributed vaccines hit the market, we believe that this will catalyze the next leg lower in the structural USD downtrend we expect," Citi wrote. "Given this set-up, there is the potential for the dollar's losses to be front-loaded, with the USD potentially falling by as much as 20% in 2021."

At the time of writing, the U.S. dollar index was at 92.40, down 0.15% on the day.

Citi's new forecast comes after markets digested two sets of positive vaccine news — one from Pfizer/BioNTech a week ago and Moderna's announcement on Monday.

On top of the potential vaccine rollout next year, there is the Federal Reserve, which will continue to use all of its tools to support the U.S. economy next year. The U.S. central bank also said that it will keep rates low even if inflation expectations rise, which would potentially lead to the U.S. yield curve steepening as well

"This is important for FX as when investors begin to rotate into value, they will increasingly rotate out of the United States given valuations on both the SPX and USD are rich versus the rest of the world," Citi said.

Back in September, Citi published a report stating that it still saw gold rising above $2,000 an ounce and hitting new record highs before the year-end. Longer-term, Citi's outlook on gold is a positive one due to the low-interest-rate environment. Citi noted that it views gold as still in the middle of its current bull cycle.

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