Dollar sank most since 1985 this week. That may be good news

By Ruth Carson, Stephen Spratt and Susanne BartonTwo weeks after investors dumped everything they could to hoard US dollars, some are now starting to sell.Intercontinental Exchange Inc.’s US Dollar Index sank 4.4 per cent this week, the biggest weekly drop since 1985. Traders point to a confluence of reasons, ranging from less stress in funding markets, the repatriation of funds as the quarter ends and the worsening coronavirus outbreak in the US.“The sell-off in the US dollar is a reaction to the liquidity measures announced by the Federal Reserve and other central banks,” said Jane Foley, a currency strategist at Rabobank. “Fear may have subsided for now.”74857738 A separate gauge of the greenback, the Bloomberg Dollar Spot Index, fell 4.1 per cent on the week, the largest weekly loss since its inception in 2005. It had surged 8.3 per cent over the previous two weeks. The greenback slumped against most of 16 major peers this week, weakening more than 7 per cent against the Norwegian krone and the British pound.The decline comes after the Federal Reserve expanded currency swap lines with central banks, ramped up cash offered to the repurchase-agreement markets and introduced a series of tools to unfreeze credit markets. Stress in cross-currency basis markets, a key funding channel, has eased.Funding markets see glimmer of light with dollar stress easingThe three-month dollar-yen basis is now back to levels seen in early March, while the euro equivalent has swung into positive territory. In foreign-exchange swap markets, the costs to borrow dollars is back to about 1.86 per cent after it printed at more than 2.5 per cent last week.“It’s 100 per cent a dollar-funding story -- the mean reversion of the dollar liquidity crunch is prompting all other FX to rally against the dollar,” said Margaret Yang, a strategist at CMC Markets Singapore Pte.Asia gainsThe dollar weakened as much as 1.7 per cent against the yen Friday amid broad greenback losses and in part by repatriation flows ahead of the nation’s fiscal year-end on March 31, according to Takuya Kanda, general manager at Gaitame.com Research Institute in Tokyo.Other currencies in Asia bounced off multi-year lows. The Australian dollar had dropped to the weakest since 2002 last week and has rebounded.Traders also pointed to the rising virus count in the US and a jump in jobless claims to 3.28 million last week as sapping the greenback. Forecasters expect data next week to show the US unemployment rate climbed.To be sure, the dollar weakness may be temporary.74857743 As the new quarter starts Wednesday, repatriation funds will slow and the haven bid from a worsening global pandemic may fuel a resurgence in demand.And while risk appetite returned to markets this week to spur a rebound in equities, Nomura’s Jordan Rochester says that sentiment may ebb next week and the dollar is likely to “regain some ground.”In equities, “it’s natural to see a rebound, but bear markets are marathons not sprints, so it’s not clear to us that the positive momentum can be sustained, especially with the potential for more lay-offs, credit downgrades and potential for defaults.”

from Economic Times https://ift.tt/2WVRQxA