A weaker US dollar is needed to support higher oil prices and economic recovery across the GCC region, according to Saxo Bank.
Market turbulence will continue in the short-to-medium term, but the dollar will weaken in the long term and drive a reflationary recovery in global commodity prices, John Hardy, the Danish investment bank's head of FX strategy, said in a virtual briefing on Monday.
"The direction of the US dollar is critical for financial markets across the world, but particularly for oil and for GCC countries with the US dollar at the centre of gravity for the region," Mr Hardy said. "A weaker US dollar is needed to support the regional recovery, and we believe that eventually it will weaken, but this could take some time. In the meantime, there could be significant market turbulence until we can firmly state that we are on the other side of the Covid-19 crisis."
The coronavirus outbreak has claimed more than 433,000 lives and infected more than 7.9 million people worldwide, according to Johns Hopkins University.
Major economies are opening up gradually, following months of business closures, travel bans and movement restrictions to control its spread.
Governments and central banks have pumped about $10 trillion (Dh36.7tn) into the world economy to revive output, stem job losses and support small businesses, according to the International Monetary Fund.
Last week, the US Federal Reserve said it would keep interest rates lower for longer to support an economic recovery from the pandemic, with almost all officials forecasting that interest rates would be kept near zero through to 2022. The central bank also said it will maintain the current level of bond purchases.
Meanwhile, the GCC's economies are being hit by the economic fallout from the virus outbreak, but also from low oil prices due to the decline in demand. Most GCC countries are also pegged to the dollar, which means "the worst risk for the GCC would be low oil prices [and a] strong US dollar", Mr Hardy said.
It will likely be a "rough ride for the rest of 2020" before the dollar weakens significantly and oil prices increase, he said.
The dollar tends to spike during a financial crisis "because tens of trillions of dollars in global financial assets are denominated in dollars", Mr Hardy said. "And when you have a crisis and liquidity goes south, you have everybody scrambling for dollars."
However, the dollar has weakened due to the Federal Reserve's vast and rapid response to the Covid-19 crisis; over a period of six weeks, it took more quantitative easing measures than during the whole of the 2008 global financial crisis.
"Because the Fed has managed to pump so much liquidity into the central bank and the global markets, they managed to turn what was a spiking dollar much lower," Mr Hardy said.
Now the question is whether dollar weakness is set to continue, but "a weak dollar tends to be associated often with quite positive conditions for the global economy", which is a long way from recovery, Mr Hardy said.
While "the total shutdown approach is going to be less likely from here", there will continue to be a "long-term suppression effect on various types of economic activity" as a result of the pandemic, he said.
Gloomy economic data and a rise in coronavirus cases in the US point to a U-shaped recovery, rather than a V-shaped recovery.
"There's been a strong, strong bid coming back in for safe haven US government treasuries all the way up to 30 years, which is to suggest the market is still on a very cautious footing here that tends to be dollar-supportive," Mr Hardy said.
With the massive oil supply overhang, it is difficult for oil prices to go much higher in the near term, for several months at least, he said.
Brent, the international benchmark, could pick up to between $50 to $70 per barrel by the first and second quarters of 2021, as demand increases and supply is balanced, Ole Hansen, Saxo Bank's head of commodity strategy, said in April.
However, Brent crude prices fell 2.48 per cent to $37.77 per barrel and US benchmark West Texas International dropped 3.78 per cent to $34.89 at 5.05pm UAE time due to fears that a second wave of the virus will dampen demand further.
"With our weaker dollar view, especially into 2021 – more so than this year – I would expect oil to be significantly higher in 2021," Mr Hardy said.
