While 2020 saw the US dollar post its biggest yearly loss since 2017, the year also saw the Aussie dollar hit 33 month highs in one of its strongest performances in years.
While the greenback became, as it always does at times of intense stress, the safe haven of choice in the confused days of the first wave of the pandemic in March and April, it reversed course as the Federal Reserve and Trump administration reveals plans for trillions of dollars in support and stimulus.
They were delivered and steadied the rout and turned it into the biggest and fastest market recovery in US history. But as we start 2021, the question is how much potency does this spending, as well as the smaller end of year sending package, still retain for the markets.
Even though vaccinations will add to confidence and the stimulus as the year goes on, there is no certainty that COVID will quickly lose its terrors for ordinary Americans, Brits, Europeans and others.
As the year goes on, governments will find themselves under more pressure to increase spending and support, especially if employment is slow to recover or starts falling again.
The US dollar hit a three-year high of 102.99 against a basket of currencies in March, before ending the year at 89.96, down 6.77% for the year and 12.65% from that March peak.
Record low interest rates and ongoing Fed bond purchases may have dented the dollar’s appeal, but they have also powered the massive rebound in markets and ignited new fears (misplaced) about the return of inflation.
Continuing expectations of extra fiscal stimulus from the Biden administration and rising budget and current account deficits as well as soaring debt will add extra pressures to the greenback’s path in the coming year.
The euro ended 2020 at $1.2215, up 8.97% for the year. It reached $1.2310 on Wednesday, the highest since April 2018, but lost ground as investors squared positions for the year.
The Aussie and Kiwi dollars both hit their highest levels since April 2018 on Thursday with the Aussie surging as high as 77.43 US cents and the New Zealand dollar reaching 72.41.
They dipped on Thursday but ended up 9.76% and 6.82% this year, respectively – the Aussie ended the year at 77.05 US cents (70.06 at the end of 2019.
After the low of just over 57 US cents in March the Aussie dollar soared by a third in the next 9 months, despite record rate cuts by the Reserve Bank and a determined attempt by the central bank to try and offset the currency’s rise without direct intervention.
The rise in the Aussie against the greenback stood out – the trade weighted index (a much broader measure) ended the year with a gain of 5.1% at 63.4.
That was the highest the TWI has been since the end of 2018 and indicates the Aussie rose against currencies other than the greenback in 2020.
The US dollar slipped 4.90% this year against the Japanese currency to 103.25 yen. It was just above a nine-month low of 102.86 yen reached in mid-December.
US bond yields eased over the year. The yield on the key 10-year Treasury ended at 0.919% on December 31, down 1% for the year but up 26 points in the final quarter on those silly fears of about inflation.
Inflation has not been a concern for US markets for a decade or more and has consistently fallen short of the Fed’s 2% target for the past five years or more. It will not, however, be a concern in Australia, despite some ‘me-too’ talk from some media and business commentators. Australia’s 10-year bond yield is around 0.97% at year’s end – down 37 points in 2020.
