US Dollar Demand Surges Globally
A possible global recession triggered a surge in demand for the US dollar. Hence, the Federal Reserve has taken measures to ease global currency strains.
In forex, the dollar had previously marked a three-year high against the euro. It also rose to a 30 year high against the pound.
It has continued to surge against other currencies, driving extreme market moves and a temporary shortage.
The Fed would expand currency swap lines to nine more countries. Singapore, South Korea, Brazil, Sweden, Australia, New Zealand, Mexico, Norway, and Denmark add to the Fed’s already existing arrangements.
The US central bank had previously established swap lines with other central banks including the Bank of England and European Central Bank.
The Fed said these facilities are designed to help lessen strains in global US dollar funding markets. It would mitigate the effects of these strains on the supply of credit. This is for households and businesses domestically and abroad.
Banks, investors, institutions, and companies worldwide rush to draw down credit lines and seek USD for funding needs.
Furthermore, the Fed fund would be in place for at least six months and make available up to $450bn or £390bn.
COVID-19 Causes Major Turmoil in the FX Market
In favor of the US dollar, investors dump stocks and other riskier assets. The coronavirus pandemic has caused turbulence in global financial markets and created growing concerns about its economic effects.
COVID-19 has created an unknown hit to the world’s economies as the number of cases begins to rise. This situation has made everyone want to hang on to the dollar cash, starting a shortage of currency. Some people, companies, and institutions hoard it for fears relating to the virus outbreak.
There is now a huge demand for the world’s safest reserve currency.
Investors have been selling financial assets worldwide fueling even more demand for USD, thus currencies are getting lower.
The Fed addresses the problem with its swap lines so institutions can have better access to dollar funding.
In FX news, the dollar index jumped 1.5% to 102.70, since March 9 when it was only at 95.
Hopefully, the Fed’s opening of new swap lines on Thursday will help them deliver dollar funding easier. However, the USD is still rallying against other currencies, failing to put an end to its upside volatility. It was 2.2% higher against the euro on Thursday and 2.4% higher against the yen.
According to strategists, G-7 finance ministers may see a need to intervene to bring down the US dollar.
