The US dollar has been losing ground since the onset of the COVID‐19 crisis but Citigroup warns it's facing a much bigger retreat in 2021.
This doesn't only have big implications for currency traders but for everyday ASX investors as such a big move will impact on ASX stock performance.
Citigroup thinks the US dollar is likely to drop as much as 20% in the new year if a COVID vaccine becomes widely available, reported Bloomberg.
A retreat of 20% or more from a peak is considered a bear market.
US dollar in bear market face-off
The greenback has already lost around 11% against a basket of other major currencies since it peaked in March. The drop against the Australian dollar is more dramatic at close to 30%!
An effective treatment against COVID will see the US dollar slide further as global economic activity will rebound strongly.
The safe haven status of the US dollar means investors tend to buy it when fearful and sell when greed returns.
Australian battler gaining ground in 2021
Citigroup is encouraging investors to buy the Aussie and the Norwegian krone as these commodity-linked currencies will benefit from an economic recovery.
But vaccines aren't the only factor pressuring the US currency. The broker believes the US Federal Reserve will stay dovish even as economic conditions normalise.
The rest of the world is also tipped to grow faster than the US and that will prompt investors to rotate out of US assets and into international assets.
History doesn't repeat but rhymes
This sets us up for a possible repeat of 2001, which marked the start of a multi-year decline in the US dollar with China joining the World Trade Organisation.
This triggered a wave of globalisation that pushed trade volumes higher and leaving the US behind due to its closed economy, according to Citi.
Experts are feeling more confident that an effective treatment against coronavirus can be found. The latest trial result from Moderna Inc (NASDAQ: MRNA) that showed a 94.5% success rate is a big reason for the optimism.
Morderna's results follows Pfizer Inc.'s (NYSE: PFE) promising trial and there are around 200 drug candidates under development.
ASX stocks that will lose out from a weaker US dollar
If the vaccine heralds the start of a new structural decline in the greenback like Citi believes, ASX stocks with large US dollar exposure will feel the squeeze when earnings are translated back into Australian dollars.
Some of these stocks include the James Hardie Industries plc (ASX: JHX) share price, Reliance Worldwide Corporation Ltd (ASX: RWC) share price, Amcor CDI (ASX: AMC) share price and Afterpay Ltd (ASX: APT) share price.
ASX stocks that benefit from a weaker greenback
On the flipside, importers that pay for goods in US dollars will benefit. These include retailers like the Reject Shop Ltd (ASX: TRS) share price and Nick Scali Limited (ASX: NCK) share price.
Gold stocks like Ramelius Resources Limited (ASX: RMS) share price and Evolution Mining Ltd (ASX: EVN) share price should also benefit.
A weaker US dollar is supportive of gold. As long as bond yields do not rise materially, ASX gold stocks should continue to do well in 2021.
