A torrent of fiscal and monetary stimulus to fight the effects of the coronavirus, combined with already-low interest rates, will contribute to a "Great Debasement" of the U.S. dollar in the years ahead, according to Bank of America Merrill Lynch.
That, in turn, will make investments in commodities and emerging markets more appealing as investors look for reliable inflation hedges and savvy ways to play a weaker greenback, BofA chief investment strategist Michael Hartnett wrote. "Interest rate repression means investors can't hedge the inflationary risk of $11tn of fiscal stimulus via 'short bonds'…so investors [are] crowding into 'short US dollar', 'long gold' hedges," Hartnett wrote.
U.S. dollar depreciation is "well underway as the default narrative for [a] US economy with excess debt, insufficient growth, and maxed-out monetary & fiscal stimulus," he added.