Bets Against U.S. Dollar Assume Early Virus Vaccine, BofA Says

A bet on the U.S. dollar declining in the medium term makes the key assumption that a vaccine against the novel coronavirus will be available comparatively soon, according to Bank of America.

That’s because Europe and Asia have a higher chance of fresh waves of infections the longer it takes for a vaccine to be found, a scenario that’s bullish for the dollar, said David Woo, a strategist at the bank.

Woo in an Aug. 3 note backed short-term dollar bears, but said many investors don’t realize the biggest view underlying a medium-term dollar short is that a vaccine will “become available sooner rather than later.”

A prolonged path to an inoculation would boost the odds “that liquidity support from central banks will not be enough to shore up financial markets,” he said. That could spur risk aversion and benefit the dollar given its status as a safe haven.

The pathogen has in recent weeks flared up in some U.S. states, threatening to hamper the nation’s economic recovery and contributing to the greenback’s worst drop last month in about a decade. A number of other factors have been cited for dollar weakness, such as negative real yields on some U.S. bonds and the boost to the euro from a European Union joint economic-stimulus package.