Published: May 11th, 2020
Four events happened this past week that showed the vulnerability of the U.S. dollar during these times of economic strain. The U.S. and Chinese representatives got back to the virtual negotiation table coming out with good news. Then, the failing bond yields clipped the wings of the world’s greatest reserve currency. As if that was not bad enough, Australia’s easing of lockdown gave the Aussie a respite surging to a one-week high. Lastly, investors clung to trade progress as it was on the backdrop of the expected U.S. jobs data. These four events fueled a surge in the dollar’s peers, highlighting the greenback vulnerability during distress.
The dollar struggled on Friday, May 8 as the other currencies surged. The rise of the other currencies was probably boosted by the good news coming out of the negotiation between China and the U.S.
Last week, Beijing and Washington reached an agreement to bolster their ties over a trade deal. This could not have come at a better time considering that many governments are procedurally opening up their economies after an extended shutdown occasioned by the coronavirus pandemic.
The dollar’s drop could also be attributed to the increased risk appetite. Investors had been keen to ignore the U.S. unemployment data. According to the latest figures released by the U.S. Department of Labor on Friday, May 8, more than 20.5 million Americans filed for unemployment in April, a record 14.7%. This latest figure brings the total number of individuals that have lost their jobs to over 30 million.
The stats translate to a decade’s worth of jobs creation all wiped out in just a single month. The speed and magnitude of this loss are incomparable. Easily, it is twice the number that the U.S. recorded during the entire time that the financial crisis lasted between 2007 and 2009.
Senior trade representatives from China and the U.S. discussed Phase I of the trade deal between the two countries on Friday. In the proceedings held over the phone, China agreed to work on bettering the environment for implementing the deal. The U.S., on its part, said it will comply while expecting China to meet its end part of the bargain.
The Australian dollar, the global currency mostly aligned to both the world’s economy and Chinese sentiments, rose by 0.3% to stand at $0.6514. Earlier in the week, the Australian currency had struck a one-week high.
China’s offshore yuan, the flagship currency of the emerging market rose by 0.1% to settle at 7.087 yuan for every dollar.
The Australian dollar was motivated by the country’s move to ease the social distancing restrictions it had earlier imposed. Canberra has seen a reduction in the spread of the coronavirus and is implementing a three-step process that it hopes will have eliminated all forms of restrictions by July.
The U.S. dollar, on the other hand, struggled to find a clear direction. A slight surge early Friday was dashed by the dismal yields of the Treasury bonds. Because of the bonds’ poor performance, the money markets in the U.S. priced in a slight instance that 2021 may record negative interest rates.
Despite the Aussie’s impressive run, some market experts are a bit cagey. Thu Lan Nguyen, an analyst at Commerzbank said it is early to celebrate. She stressed that the rise of the Aussie could be temporary since no one really knows just how deep the Australian economy has collapsed or how long it will take to make a complete recovery.
Lan Nguyen said that because of the many grey areas, the uncertainty will remain high and for the same reason, the Aussie remains vulnerable.
Market sentiment about the dollar and its negative trends elicit similar reactions pegged on the uncertainty. According to Citi’s senior G10 FX strategist Ebrahim Rahbari, the possibility of the bond rates sliding into the negative gives the dollar a slightly bearish feel. This is true especially because there is a limited market pricing now coupled with the ongoing plans by the Federal Reserve to debase the dollar.
Rahbari, however, thinks that the U.S. stimulus packages have so far been aggressive and forceful. These two characteristics, the economist thinks, are likely to increase the pace of economic recovery in the U.S. since they will attract capital inflow and in turn support the dollar.
The drop of the greenback left the currency’s index against that of the six major currencies dropping by 1% to stand at 99.758. The euro which had earlier recorded slight gains posted a high of 0.1% moving to $1.0839, which is several dashes above the two-week low of $1.07665 that it had posted the previous day.
The euro’s prospects had dropped following the ruling by a German court. Analysts think that ruling jeopardizes the bond-buying scheme that the European Central Bank (ECB) is fronting. Overall, the euro dropped 1% on the week.
The pound, however, edged higher though on the backdrop of only modest trading. With Britain breaking to celebrate the palladium jubilee of the end of World War II in Europe, the thin trading brought GBP to $1.2376, a surge of 0.1%.
Despite going down against almost all the major currencies, the greenback was stronger against the Japanese yen. It posted a modest increase of 0.1% to stand at 106.35 yen. This was several points above 105.985 yen it recorded on Wednesday, which is also the dollar’s seven-week low against the Japanese currency.
Despite the dollar’s lackluster performance, Wall Street was up probably because traders swept the bad news about the layoffs under the rug. The Dow Jones Industrial Average picked up 455.43 points the same day the Department of Labor released the saddening news.
The past week has not been great for the dollar. Because of the uncertainty surrounding the level of injury that the coronavirus has meted on the global economy, most investors are growing an appetite for risk. This trend in the markets has left the dollar exposed. Its peers, however, took the greenback’s misfortune to gain about 0.1% on average.