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Forex - Dollar Retreats as Liquidity Stress Eases

Published 20/03/2020, 08:56
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By Peter Nurse

Investing.com - The U.S. dollar was sold in early trade in Europe Friday, with a more optimistic mood taking a hold of the markets as central banks continue to work on getting dollar liquidity to all corners of global markets. The expansion of swap lines between the Fed and its counterparts elsewhere has meant demand for the key safe haven play has been lessened.

At 04:10 ET (0810 GMT), EUR/USD traded at 1.0777, up 0.8%. The U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 102.209, down 1.4%, while USD/JPY fell 0.9% to 109.73.

Late Thursday, the Federal Reserve said it would expand the currency swap lines to nine more countries, including central banks in Singapore, South Korea, Brazil, Sweden, Australia, New Zealand, Mexico, Norway and Denmark.

This comes amid reports of a "phase 3" package of fiscal support being prepared in the U.S. by Senate Republicans worth around $1.2 trillion.

One of the currencies which has gained the most against the dollar Friday has been the previously beleaguered pound, with GBP/USD up 2.8% to 1.1812.

The Bank of England on Thursday slashed rates and expanded its bond-buying program, saying it would increase its purchases of government and investment grade corporate bonds by 200 billion pounds ($230 billion) to 645 billion pounds.

Sterling has suffered of late, with GBP/USD falling Thursday to its lowest level since 1985, as many have seen the response by the U.K. authorities to the coronavirus outbreak as being late and insufficient. However, the central bank’s move is likely to provide funds for the chancellor to announce further measures to help cushion the blow.

The rate-setting meeting of Russia’s central bank later Friday will also be of interest. 

The ruble has been hit hard this month, weighed on by a weak oil price and the rush to dollars as a safe haven as the coronavirus has hit the global economy. With this in mind, some market participants are expecting a hike from the current rate of 6.0% to support the currency. 

However, ING said that holding rates steady, rather than hiking by 25 basis points, would be tightening enough. The bank points to the Russian central bank’s announcement Thursday of daily sales of foreign exchange on the open market, related to the sale of its 50% equity stake in Russia's largest lender Sberbank to the National Wealth Fund. 

“The central bank's increased focus on the FX market suggests the lower importance of the policy rate and inflation targeting logic at this point,” said Dmitry Dolgin, an analyst at ING, in a research note. “We take it as another confirmation of our view that CBR is not planning to increase the key rate tomorrow in the current market conditions.”

At 03:55 ET (0755 GMT), USD/RUB traded at 78.05, down 1.4%, having intervened on Thursday to keep the ruble below 80 to the dollar.

 

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