Dollar rallies as investors brace for global downturn

The dollar gained broadly against riskier currencies on Wednesday, with markets staring at what is likely to be one of the worst economic contractions for decades as the world locks down to fight the coronavirus pandemic.

The greenback advanced against the Australian and New Zealand dollars, sterling, and most emerging market currencies as fresh selling in global shares highlighted growing risks from the pandemic that has shown little sign of abating.

The Australian dollar dropped 0.35 per cent to $0.6115 and the New Zealand dollar fell 0.3 per cent to $0.5945 while The British pound shed 0.4 per cent to $1.2376.

Emerging market currencies were hit harder, with the Mexican peso falling more than 1 per cent to 23.960 to the dollar, while the South African rand gave up 0.7 per cent to 17.952 per dollar. Most Asian currencies also dropped.

While the dollar's status as the world's reserve currency makes it a natural safe haven, investors also flocked to the safe-haven yen, which gained 0.2 per cent against the dollar to 107.33 per dollar.

The euro eased 0.2 per cent to $1.1015 but gained against most other currencies as its vast liquidity is attractive at times of economic stress.

“In my view, markets have still not fully priced in the damage from the coronavirus, with some people still talking about V-shaped recovery,” said Masahiko Loo, portfolio manager at Alliance Bernstein in Tokyo.

“The US and Europe are hit by the first wave now, but as you can see in Asia, there could be more waves from re-imported cases. Human psychology also does not quickly recover either after an experience like this.”

The dollar held beneath overnight highs against most majors and was well below multi-year peaks made last month, before the Fed pumped more dollars into the system to calm markets.

The Fed on Tuesday broadened the ability of dozens of foreign central banks to access dollars during the coronavirus crisis by allowing them to exchange their holdings of US Treasury securities for overnight dollar loans.

“The whole experience is testing the maxim in the market of 'don't fight the Fed,'” said Kyle Rodda, analyst at broker IG Markets in Melbourne.

“The Fed clearly wants to do everything it can necessary to ensure dollar liquidity, which puts downward pressure on the dollar,” he said.

“But by the same token there is still this very structural push to buy dollars right now because liquidity is coming at an absolute premium with so much risk in the market.”

Against a basket of currencies the dollar gained 0.3 per cent to 99.290.

Sharp Contraction

Manufacturing data in Asia painted a bleak picture. Factory activity in Japan and South Korea posted the biggest contractions in about a decade.

The Bank of Japan's “tankan” corporate survey showed Japanese manufacturers turned pessimistic for the first time in seven years.

Surveys due later on Wednesday from countries including Germany and the US are expected to do similarly little for investor confidence, while US private employment data is likely to show a drop in payrolls.

The virus has now killed more than 42,000 people and infected more than 851,000 in 205 countries.

Goldman Sachs on Tuesday said it now forecasts a real GDP sequential decline of 34 per cent in the US this quarter, on an annualised basis, compared with an earlier estimate of a 24 per cent drop.

“In the absence of either a material improvement in global risk sentiment, or commodity prices, then together with ongoing dollar strength, we are not convinced the Australian dollar can easily maintain its foothold back above $0.60,” National Australia Bank analysts said in a note.

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