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    Why will investors in 2020 trust the dollar more than the euro?

    August 19, 2020 by Mezba Uddarain Leave a Comment

    The thing is that the European economy has approached the sudden outbreak of the crisis with a heavier burden of problems than the United States. Despite a rather controversial and risky foreign policy, Trump’s domestic policy aimed at supporting local business and boosting economic growth has proven its viability in recent years, which makes his chances of moving forward to a second presidential term quite serious.

    Nearly 60%, according to a poll conducted on the eve of the crisis, reported that their Americans’ financial situation had improved over the past year, and about 75% of those surveyed believed that they would do even better in 2020.

    Of course, the pandemic has greatly upset Trump’s plans to achieve 3% economic growth and reduce unemployment. In recent months, the US economy has faced a decline in domestic demand and unemployment that was not even the case during the Great Depression.

    But the Americans, unlike the Europeans, have huge opportunities to flood the economy with practically free liquidity (the launch of the FRS printing press has reached unprecedented volumes, which, of course, will affect the sky-high increase in the US government debt, but so far investors in the US and the world do not really care) … Moreover, in the event of an inflationary shock, the Fed can always return to a gradual rate hike .

    Given that the Fed and the US Treasury are ready to almost completely cover all the risks and losses associated with the pandemic and its consequences, the American domestic political situation is much more stable than the European one.

    In addition, Europe is much more dependent on the fall in global demand than the United States, where the economy is based on domestic demand.

    As for Europe itself, a political storm began in it, even before the crisis, which could break out into a real hurricane. For example, in Germany, the EU’s key economic, hopes for the continuity of Angela Merkel’s course are melting before our eyes, and no worthy alternative to her rule is foreseen yet.

    French President Macron is not abandoning his attempts to regain his country’s leadership in geopolitics, trying to win over Britain, which after Brexit is rapidly moving away from the political and economic problems of the EU. But at the same time, France’s economic lag behind Germany is becoming stronger and more noticeable.

    Meanwhile, on the European political arena, the position of the Eastern European countries, which are actively demanding economic assistance, is being heard more and more loudly. However, first of all, Old Europe will have to be saved: namely, Italy and Spain, which the “coronavirus” battered more than others. The European Union will have to provide very serious financial assistance to these countries, otherwise, Italy and Spain may declare a default (and even begin negotiations on leaving the EU after the UK), which will entail the collapse of the European currency.  

    These countries are asking allies to issue Eurobonds, but Germany and Austria are sharply opposed to such a measure, which fear that all the risks associated with servicing the new debt will fall entirely on their budgets.

     In addition, after the pandemic, protectionist tendencies became apparent to many members of the bloc, which have intensified in recent months. This, of course, will have a detrimental effect on the already complicated relations within the European bloc, the whole point of which is open trade with each other and theoretically equal conditions for all member countries. 

    While the ECB still has the opportunity to write off the largest part of the debt of countries such as Italy or Spain. And so far this seems to be the only possible way out of the situation, since such a measure as, for example, a decrease in lending rates is unavailable due to already zero and even negative interest levels.

    The rather shaky internal political situation in the EU may lead to poor coordination and low efficiency of measures to restore the European economy after the end of the COVID-19 epidemic. Therefore, at least until the end of 2020, investors around the world will continue to look towards the European currency with less confidence, leaning more towards the only stronger (yet!) Alternative in the form of the US dollars.

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