The great reset is upon us and ends when the USD tops The great reset is upon us and ends when the USD tops The great reset is upon us and ends when the USD tops

The great reset is upon us and ends when the USD tops

John Hardy

Head of FX Strategy

Summary:  The USD needs a significant markdown in the years ahead to allow a global recovery to proceed.

A great reset of the global debt bubble is upon us.

The first steps washed over the currency market with the usual patterns of risk-off behaviour and squaring of crowded speculative positions. EM currencies have collapsed, the smaller G10 currencies are universally under pressure. Interestingly, the US dollar came under initial pressure against the Japanese yen and euro on the initial deleveraging, but later mounted a broader and more vicious rise akin to what we saw in the worst phase of the 2008-09 crash. This USD rise came even as the Fed, just as then, chopped rates to zero and launched all manner of QE and liquidity facilities. 

And it is very likely, just as back in early 2009, that we can’t call a bottom for the markets or peak moment for the crisis until the USD itself has turned. It was in March 2009 that both the S&P 500 bottomed and the USD peaked. With so much of the world’s debt and other instruments denominated in US dollars, the Fed struggled to get ahead of the contagion as everyone deleveraged in a mad ‘dash for cash’. The situation echoes back as far as 1933, when the beginning of the end of the worst phase of the Great Depression came after FDR finally devalued the USD against gold (about three years later than should have been the case).

Comparing USD in 2020 to USD in 2008-09 

We have entered this yet-to-be-officially-named crisis in a very different place than where we entered the 2008-09 financial crisis. The chart below indexes the Bloomberg USD index to 100 starting from Jul 1, 2008 vs. the USD at 100 in Feb 1, 2020. Back in 2008, the USD was already quite weak as the Fed’s prior easy money policies of the 2002-04 era supercharged USD liquidity and investment bank balance sheets and carry trades, with JPY- and CHF- carry trades adding to the global liquidity. This time around, we entered the crisis with a US dollar that was relatively strong, if we use a traditional measure like the USD index (although EM currencies were rather strong on the reach for yield before this Covid-19 outbreak hit). The big spike higher in the big dollar then, as now, goes to show that when crisis comes calling the world can’t get its hands on enough US dollars and we likely need the USD lower to call an end to the equity and risk bear market. In 2008-09, it took about 9 months for the USD to top out – can policymakers cut the funding pressures shorter this time around? (Chart source: Bloomberg)


The trigger of this credit crunch of unforeseen magnitude is of course the coronavirus outbreak. But the severity of the fallout is a product of a financialised global system made so incredibly fragile by the leverage encouraged by ZIRP and NIRP, plus the QE medicine used to alleviate the ills of the last crisis. 

From here, it may take at least a couple more quarters to establish a cycle low in the market and a high in the USD — even as authorities swing more determinedly into action than we have ever seen. This time around, due to the severity of the issue policymakers have no qualms about throwing orthodoxy out the window and printing infinite amounts of cash to drop on the economy. Contrast that with the halting efforts in the US that kept the system from clearing fully from 1929 until the outbreak of WWII in late 1941 with Pearl Harbor. The cycles have been getting shorter since the Great Depression, with market top to market bottom in the GFC coming in around 18 months. 

Relative to the global financial crisis, the medicine this time around will include far more helicopter money and far less QE. Real GDP may be slow to recover — but helicopter money is going to help nominal GDP come roaring back at some point first.

A note of encouragement in a scary environment: long-time investors know that crisis points are also the points of maximum opportunity for those with cash in reserve. And the coming six to twelve months will bring extreme value to various oversold assets, regions and their currencies, even if calling the timing of the low is a fool’s errand. Below we look at new themes for currencies that we think are likely to emerge as we transition through and to the other side of what may prove a U-shaped recovery with a bumpy bottom into 2021. 

These FX themes and drivers differ from those of the recent and pre-GFC past, when carry and investment flows in a globalised financial system were the chief focus.

Putting out deflationary fires = inflation?

We are convinced that the policy medicine of MMT will eventually be employed on sufficient scale to avoid deflationary outcomes. If so, and if inflation stages a sharp recovery and even begins to run hot, the key metric that many are likely to focus on for relative currency strength is the real interest rate — how much the CPI exceeds the policy rate at various points on the sovereign bond curve. Those countries overheating the printing press and running ugly, negative real rates will eventually find their currencies weakening rather than benefitting from the initial push of fiscal stimulus. 

This is actually the normal pattern for EM currencies. Watch the coming months very closely for this inflation transition to arise, as the demand crunch risks destroying capital and thus the available supply of key products once the economy finds its feet again. Plus, as the dust settles in coming quarters, investors should track the purchasing power measures of various currencies as we inevitably discover that some are proverbial babies that have been tossed out with the bath water, as is always the case in a crisis. These could include SEK, CAD and (with some patience) sterling and Aussie. 

Autarky and a new deglobalisation

The coronavirus outbreak and the US-China trade policy hostilities that preceded it are likely to add to the deglobalisation impulse that was already underway before the virus outbreak. Countries and economic blocs like the EU will have a vastly increased interest in ensuring that key security and health products — think medicines, surgical masks and ventilators; some basic goods; national defense products and electricals — are made closer to home. This will drive investment and current account considerations that will prove critical for currency fundamentals, with perhaps fewer traditional financialised capital flows.

Those countries that are vulnerable from a current account perspective could be punished (the UK needs to show it can balance its current account if this era of financialisation is waning, for example). On the flipside, the traditional major export powers like Germany (EUR or dare we ask DEM eventually?), Singapore (SGD) , Sweden (SEK), Switzerland (CHF) and others may find this a less friendly environment for their currencies as their access to international markets is reduced — all relative to purchasing power as noted above.

Commodity exposures

With the era of over-financialisation likely ending, hard assets and commodities that are difficult to produce or replace domestically could experience a renaissance and drive significant gains for individual currencies. The AUD, NZD and CAD are likely eventual winners in this category (once they get to the other side of their domestic credit bubble unwinds). So could the BRL and even the RUB, from extremely cheap levels. 

The USD is also a winner here, but needs a significant markdown in the years ahead to allow a global recovery to proceed. And it could be in trouble from a real interest rate perspective, as discussed above. The JPY is vulnerable if commodity imports rise and deglobalisation risks its export markets, alongside long-standing issues like its shrinking labour force and enormous retired population.

Ending the USD dependency

In addition to the drivers above, likely the most interesting theme afoot in coming years will be the scramble to find alternatives to the US dollar. This crisis is proving even more clearly than the last one that the fiat-USD-as-global-reserve-currency system is dysfunctional beyond all attempts to salvage it. Complicating the search for an alternative is the fact that in a deglobalising world, Bretton Woods-style arrangements will prove very hard to come by. 


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.