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US Dollar Aims Higher as Markets Liquidate on Coronavirus

US Dollar Aims Higher as Markets Liquidate on Coronavirus

2020-03-21 13:00:00
Ilya Spivak, Head Strategist, APAC
US Dollar Aims Higher as Markets Liquidate on Coronavirus


  • US Dollar soars as market-wide liquidation puts a premium on cash
  • Incoming economic news-flow unlikely to change risk-off narrative
  • Peak in coronavirus spread needed before stimulus can be effective

The US Dollar has emerged as a distinct beneficiary of the market-wide panic triggered by the coronavirus outbreak. As whole national populations go to ground in a bid do contain the pandemic, economic activity has taken a crippling hit. Not surprisingly, that has severely eroded the outlook for any asset positively geared to global growth, be it stocks or pro-cyclical commodities like crude oil and copper.

This has inspired a wave of selling across the market spectrum. Not surprisingly, the Greenback’s unrivaled liquidity has made it particularly attractive in this environment. That acts as a dampener on volatility and makes the Dollar a conveniently flexible vehicle for subsequent reinvestment whenever the turmoil eases. Over 80 percent of global monetary transactions are settled in USD, according to the BIS.


Looking ahead, markets are likely to remain focused on policymakers’ efforts to backstop the global economy amid the ongoing crisis. A wave of monetary and fiscal stimulus measures has been unleashed. Central banks around the world slashed lending rates and flooded markets with cheap credit. Governments have also moved to dole out cash as activity sputters and a jump in unemployment looms.

However, the ongoing lockdown in much of the world – essential though it is to fight the virus’ transmission – limits the immediate efficacy of such measures. Cheap financing and subsidized purchasing power are not incentive enough to spur a boom in investment and consumption when so much of global commerce is offline and so many people are huddled behind closed doors. Containing the virus will have to come first.

So, upending the current narrative seems unlikely even as markets look with some interest on the outcome of a G7 foreign ministers’ summit and a meeting of EU leaders – both via video conference – as well as a Bank of England policy announcement. Incoming PMI data from the US and Western Europe will probably confirm what is already widely suspected – the global economy is rapidly contracting.

The pace and spread of contagion will thus remain a critical consideration for investors. Seeing the outbreak peak now seems to be a prerequisite for any kind of meaningful improvement in risk appetite. A Bloomberg gauge of US financial conditions shows sharp deterioration despite the Fed’s bountiful easing, with credit at its scarcest since 2009. This may keep cash – and thereby the Dollar – trading at a premium.

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--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter


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