Published: August 25th, 2020
A combo of weak data and the Fed outlook helped push the dollar out of a 2-year trough. With a surging unemployment jobless claims, the greenback took a moment to solidify the gains it made on Wednesday, August 19. Moreover, the less dovish-than-expected proceedings from July’s U.S. Federal Reserve policy meeting might have provided the last nudge.
On Thursday, August 20, the U.S. Labor Department released the jobs data indicating that the country’s jobless claims once again shot past 1 million. The information swayed market sentiment that helped the dollar to gel the previous day’s gains. The combination of the two factors and the less dovish-than-expected minutes of the U.S. Federal Reserve policy meeting last month was responsible for lifting the dollar from a two-year low.
At the close of the week that ended on Saturday, August 22, the dollar index was up about a per cent up from 92.124 that it hit on Tuesday, August 18. During the mid-morning trading session on Thursday, August 20, the index was relatively flat at about 92.954. However, it had signs of holding on to the gains made during the previous day’s trading session.
The economic data may have injected the necessary impetus that also raised other safe-haven currencies. For instance, the Japanese yen climbed about 0.14% to stand at 105.95 on the dollar.
The Department of Labor of the U.S. reported on Thursday, August 20, that 1.106 million Americans had filed new claims for unemployment benefits for the week that ended on August 15. The department termed the numbers as an unexpected rise considering that 971,000 complaints were filed the previous week.
The level recorded the previous week marked the first time since March that the country had less than 1 million claims. According to Joe Manimbo, a senior market analyst with Western Union Business Solutions, the greenback weathered dispiriting news coming from the job market, and this information may have affected the broader market and provided a lift for the haven currencies.
Minutes of the Federal Open Markets Committee meeting were released on Wednesday, August 19, encouraging dollar bears to accumulate the critically shortened currency. Their action fired up the greenback’s steepest one-day increase in more than two months.
Bears have seen significant returns for shorting the dollar, especially in the face of the U.S. fighting to tame the spreading tide of the coronavirus pandemic. Moreover, the never-before-seen policy stimulus by the Federal Reserve had dimmed the dollar’s outlook, serving to feed the frenzy.
However, with short bets nearing historical extremes and fears of a resurgence of the virus in Europe, investors are getting less bearish about the dollar. Manimbo said that the massive sell-off that brought the greenback to a 27-month low corrected after the markets saw the minutes of the Fed policy meeting. According to him, the markets read the minutes as less-dovish.
The details of the July meeting, which Manimbo say did not indicate a policy shift towards capping treasury yields, also did not provide a federal position on allowing inflation to increase due to the expected extended good growth.
Manimbo said that instead, the tone set in the minutes accelerated aggressive profit-taking for what is turning out to be the most profitable trade this summer: shorting the dollar.
On the other hand, the euro, which often is the biggest gainer when the dollar falls, slid below $1.19.
While the dollar remains safe from the deep sinkhole that it emerged from last week, it has shed some of the gains it made on Thursday, August 20. Instead, riskier currencies and European stock have rallied.
A cross-section of analysts thinks the slide is attributed to the news that U.S. regulators had approved treatment for COVID-19 before the Republican National Convention, which started on Monday, August 24, in Charlotte, North Carolina, and runs through Thursday, August 27.
More than 170,000 people have died of coronavirus-related complications in the U.S. alone. On Sunday, August 23, the U.S. allowed hospitals and care facilities under the emergency use authorization, to apply blood plasma from recovered patients to manage the condition in convalescing individuals.
Despite the sliding dollar, the European indexes opened on a high, and the Asian equities strengthened overnight. Norwegian krone and other riskier currencies such as the Sterling pound, Kiwi and Australian dollar all rose.
The greenback fell almost immediately as the markets opened for trading in Europe, going down about 0.2% to stand at 92.972. Despite the overall excellent performance, the dollar is down about 0.5% down this month against the basket of currencies.
Derek Halpenny, the head of research for global markets and international securities at Mitsubishi UFJ Financial Group (MUFG) said that while the news about the blood plasma treatment could alter trends, its effects will be short-lived.
Derek thinks that investors will be relatively doubtful of the news coming from President Trump and his team, especially between now and the election date. There is every incentive for the incumbent to ramp up some positive emerging information or speed up approvals, Derek added.
He said that the market expects a vaccine to come at about the year’s end and gradually reach the population in Q1 and Q2 of 2021. It would take a lot to sway the markets to factor in anything more rapid than nine to twelve months, Derek added.
With the data-light nature of these times, market participants have probably trained their eyes on the events in Charlotte. They are hopeful President Trump will inspire the market sentiments in his bid to refocus his faltering reelection campaign.
The dollar ended last week on a high, having emerged from a two-year trough. However, as the week began and with news that the U.S. government had allowed an emergency COVID-19 treatment, the currency slid, albeit mildly. On the other hand, the riskier currencies gained. Markets are watching the Republican National Convention, to see if the promises from the podium will sway market sentiment.