Dollar Bulls as Insurance Policy to Fight Coronavirus Impact
The past few days became a bumpy ride for the dollar. Despite that, one strategist stated that it is one of the best places to park their money in the current market turmoil.
On early Friday, the dollar index, measuring the greenback against a basket of major currencies, was trading 0.25% lower at 96.574. And this happened following a month that saw the index gain about 2%, before declining back over 3% from its February high.
Global head of FX strategy, David Bloom, stated that currency traders must consider what the U.S. is throwing at the Covid-19 outbreak.
Then, the U.S. Federal Reserve recently cut its benchmark interest rate by 50 basis points on Tuesday. They attempt to mitigate some of the economic impacts of the coronavirus crisis. On Wednesday, the House of Representatives passed a sweeping bill allocating over $8 billion in funds.
Boom explained on Thursday they had that best starting point, “you’ve thrown 50 basis points at it, you’re throwing billions at it, and everyone says, ‘I’m bearish.'”
Bloom’s Perspective
Based on Bloom, the Fed’s unexpected move actually made the dollar more appealing than other G-7 currencies such as the euro. Typically, when a central bank cut rates, its currency falls. Now, following the Fed’s emergency rate cut Tuesday, the dollar index dropped sharply.
Even with this, Bloom highlighted its risk-off properties.
According to Bloom, the thing about the dollar is when a person purchases it, they get a free insurance policy against every bad thing. And this is the reason why the dollar performs well, and Bloom thinks it’ll continue.
He said that the U.S. is in the most suitable place to start off with; they saw from the numbers on Thursday it’s the strongest economy. And they have policy action they’re putting in. “Wouldn’t you prefer that someone who sits back and does nothing?”
Bloom indicated that the European Central Bank couldn’t chop interest rates because they are already slow enough. The ECB’s primary deposit rate currently sits at -0.5%.
Recession
Rabobank’s senior FX strategist Jane Foley suggested that the dollar will stay strong as coronavirus worries continued to weigh on sentiment.
She noted, “Irrespective of Fed rate cuts, in our view demand for the USD” might be firm as long as the coronavirus crisis further continues and “fears of recession build in various parts of the global economy.”
Foley also said that Rabobank has already shown a forecast of a mild recession in the U.S. this year, irrespective of the outbreak. However, the closed nature of the American economy signals that the fallout seems to be far greater elsewhere.
According to Foley, in the importance of the USD as a transactional currency and a store of value, it is not an environment that might encourage a steady flow out of the greenback. Contrarily, concerns of a liquidity crunch are more likely to bolster USD demand.
But still, other analysts are less bullish in their outlook for the dollar.
On Wednesday’s note, macro strategist Kit Juckes thinks that the Fed was not finished cutting rates yet. And other economic factors, according to him, will pull the dollar downward.
