Inflation Rages and US Dollar Collapse

June 2, 2021 at 06:02 PM

The US dollar index has been dropping lately, and now it is facing the strong support level of 89.60 again. There are all chances that this level will continue dropping and will decline the critical support of 89.20. The last possible level of defense below that is somewhere around 88.40 and it is like the lowest it can fall. If it goes even lower, then we will be back to the 2012-2013 when the support level was 84 with a possible decline of 5%.

This situation would probably result in the EURUSD dropping to 1.40 and the USDJPY back below 100. The main reasons for such a drastic dollar drop are never-ending massive money printing, and high inflation which is a result of never-ending massive money printing. 

Commodities Sky Rocketing

Corn, soybeans, and wheat rose to multi-year highs, with corn having risen from around 3.80 USD per bushel in January 2020 to 6.75 USD now. Chicken wings are at record highs. 

The sky prices have been noticed in copper price, which is the highest of all times, also, steel recently traded at prices 35% above the previous all-time highs set in 2008. Additionally, the price of lumber has nearly quadrupled since the beginning of 2020 and has nearly doubled just since January. Silver has increased more than twice its price since COVID lows. West Texas Intermediate (WTI) oil is up from 0 last April to 67 USD today. 

While commodity prices increasing, prices of manufactured goods are rising fast too. The median price of existing homes in the US rose to 329,100 USD in March—a stunning 17.2% increase from a year earlier. Finally, the average used car price has risen 16.7%, and new car prices have risen 9.6% since January.

The Fed Remains Dovish

According to the Federal Reserve (Fed), the current inflation is transitory and that they have it under control. But considering all the facts that were mentioned above, investors don’t seem to agree. 

The uncertainty is hitting the US dollar. Should this inflationary environment continue, the Fed and the US government really risk the EURUSD rising to 1.40, most likely sending other assets higher up as everything is traded in US dollars. 

Alternatively, if the Fed starts to tighten monetary policy, the USD might defend the mentioned supports and potentially jump above 90 again. But since the Fed has said many times, it is not ready to think of tightening. The most likely scenario continues to be that the greenback will continue falling.

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