Interdependence of the Pandemic, the Economy, Dollar, and Gold

August 10, 2020

In this age of uncertainty, one of the most widely believed truths to emerge in 2020 is that future economic performance hinges on the evolution of the pandemic. Countries that contain the virus will be best positioned for sustained economic recovery, and their currencies ought to reflect that advantage.

By just about every metric, the United States has not managed the pandemic as well as just about all other countries on the planet. The 195 U.S. deaths from Covid-19 as of March 19th represented just 2.1% of the global total. The death toll multiplied over 850-fold in the ensuing 4-1/2 months to 165.8k compared to an 89-fold advance in global deaths and now represents 22.5% of the worldwide total. With 4% of the world’s population, America accounts for 26% of identified Covid-19 cases. Nothing in how the United States is handling the pandemic suggests that this yawning gap is about to reverse.

March 19th coincides with the start of the dollar’s downtrend. Since then, the DXY trade-weighted value of the dollar has depreciated 10%. That index measures the dollar against six other currencies, led by the euro with a weight of 57.6%, the yen with a weight of 13.6%, sterling with a weight of 11.9%, the Canadian dollar with a weight of 9.1%, and the Swedish krona and Swiss franc — each with weights under 5%. Bilateral drops in the dollar since March 19th amount to 12.3% against sterling, 9.3% versus the euro, 9% vis-a-vis the Canadian dollar, 7.4% relative to the Swiss franc and 4.4% versus the yen.

An impressive rise in the U.S. stock market since the dollar peaked does not appear to reflect improving growth prospects. The more plausible driving factor has been very accommodative monetary policy pursued by the Federal Reserve and many other central banks. The pandemic on balance is exerting greater downside thanĀ  upside stress on inflation, and the 10-year U.S. Treasury yield has roughly halved from its 1.13% level on March 19th. The 37.6% upsurge in the price of gold since March 19th gives even further credence to the assertion that recent dollar weakness most likely reflects concern that the United States will not continue to outgrow other economies.

Last quarter, U.S. real GDP slumped 32.9% at an annualized pace and by 9.5% compared with the second quarter of 2019. Real GDP in the euro area, however, plunged even faster by 40.3% annualized and 15.0% from its year-earlier level. That ranking may switch places in the second half of 2020 if the pandemic poses greater resistance to economic activity in America than in other developed economies.

In more ordinary times, gold tends to see-saw with the dollar. The fact that gold soared almost four times faster than did the dollar fall since March suggests that investors may be hedging against a more transforming moment for America than suggested merely by the country’s difficulties with slowing the spread of Covid-19. The pandemic hit the United States at a time when it was already highly fractured on cultural, class, and racial lines. Deeply entrenched divisions going back to colonial days have been exposed raw, which in addition to more recent slides in education and infrastructure raise legitimate doubts that America’s global role can be restored to pre-2017 levels regardless of how the election’s outcome. And with the vote less than four months away, the uncertainty of its outcome is now introducing a fresh uncertainty to stalk the dollar.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.





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