US Dollar Consolidates on Safe-Haven Bids

Ibeth Rivero

Despite the situation and given those efforts to make the dollar less attractive, traders have (repeatedly) expressed their preference for the greenback since the beginning of the crisis. 

DollarLast week the US dollar index, which measures the performance of the greenback against a basket of foreign currencies, advanced 0.28 percent, amid confusing signals regarding the future of the economy and the advance of the coronavirus crisis.

This year so far, the US dollar has appreciated 3.58 percent against the other currencies, maintaining an edge against other popular safe-haven currencies like the Japanese yen.

At the moment, the United States is probably one of the most affected countries by the advance of the coronavirus, with 738,913 confirmed infection cases and a death toll of 39,015. This situation has brought in chaos into the American stock markets as it's been erasing the advances of the last couple of years. Thus far 22 million Americans have claimed unemployment and the shutdowns caused by the coronavirus will most likely cause an economic decline of 6 percent, at least according to the International Monetary Fund forecasts.

To face the pernicious effects of the virus in the economy and avoid the quick appreciation of the dollar, the Federal Reserve has provided a massive liquidity injection through the expansion of its asset purchasing program, as well as establishing liquidity swap lines with several central banks and establishing lending programs. In total, the Federal Reserve has provided around the US $2.3 trillion in economic aid through lending programs and has been purchasing an unlimited amount of mortgage-backed securities, treasuries and other assets.

 

The US government also launched a US $2 trillion fiscal stimulus program that is expected to add 1.8 Trillion to the already big budget deficit in the upcoming decade. The US debt levels and the deficit are approaching levels we have not seen since World War 2, which has sounded the alarms regarding a potential debt crisis.

Despite the situation and given those efforts to make the dollar less attractive, traders have (repeatedly) expressed their preference for the greenback since the beginning of the crisis. This is understandable despite the negative effects of the virus in the American economy and the efforts to increase the dollar supply, especially because the economic situation in the rest of the world doesn't seem to have better prospects. The European Union's Gross Domestic Product, for example, is expected to decline 7.5 percent, in line with the rest of the world except for east Asian countries which are expected to remain in the positive territory.

Besides what has already been mentioned, it must also be noted that the dollar is considered the world's reserve currency, so it makes sense that business owners are hoarding them to keep afloat in terms of liquidity during the crisis.

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It seems that US President Donald Trump favors the current scenario. This position contrasts with his previous claims, as he used to criticize the idea of having a strong currency while claiming that it would affect US manufacturers.

“The dollar is very strong," said Trump last week, “And dollars -- strong dollars are overall very good," he added.

Despite having its advantages, an over appreciation of the greenback has its downsides. On one hand, a strong dollar would consolidate the greenback's position as the world's reserve currency as well as cheapening imports, on the other hand, this situation hurts exporters and emerging markets economies that depend on their dollar reserves and whose debts are denominated in this currency.

At the moment we all are expecting to (at least gradually) get back to normal, given the declining infection rates around the world. This improvement in the situation is expected to persist in the near future, but the truth is that we can't be sure about that unless we get a vaccine or a cure for the illness soon.

Even if we get back to normal in the upcoming weeks, it may be wise not to expect a V-shape recovery soon, especially if the US government insists on keeping social-distancing measures in place. Given that, it is advisable for dollar traders to monitor economic indexes carefully in the upcoming months, as the risks of a world-wide recession are now more relevant than ever.

About the Author
Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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