Dollar holds the upper hand as recovery doubts creep in

  • The dollar’s index against a basket of currencies advanced 0.1% to 97.27.
  • The euro retreated to $1.1246 while the British pound stepped back to $1.2411.

The dollar held the upper hand on Thursday as an increase in coronavirus cases in the United States and fresh trade tensions undermined hopes for a quick global recovery and prompted investors to trim bets on riskier currencies.

The dollar’s index against a basket of currencies advanced 0.1% to 97.27.

The euro retreated to $1.1246 while the British pound stepped back to $1.2411.

New daily U.S. virus cases surged to nearly 36,000 in the latest tally, near a record of 36,426 hit in late April. The percentage of positive results in tests is also climbing.

The governors of New York, New Jersey and Connecticut ordered travelers from nine other U.S. states to quarantine for 14 days on arrival as Covid-19 showed signs of surging in the southern and western parts of the country.

“The market is getting worried that this is not just a temporary spike. Things could be actually getting worse, and with the U.S. being the world’s largest economy, any further economic shutdowns would have serious repercussions,” said Bart Wakabayashi, Tokyo Branch manager of State Street Bank and Trust.

In California, which has seen sharp rises in new cases in the past few days, Disney Parks said it will delay re-opening of theme parks and resort hotels.

While some investors expect the economic impact from second wave infections could be smaller than the first one, others worry that policymakers might fail to respond forcefully and risk further economic damage.

Also souring the mood was news that Washington is considering changing tariff rates for various European products as part of the trading partners’ aircraft dispute. 

“The risk-averse mood is supporting the dollar. After the markets have priced in all the positive news about economic recovery, now we are seeing the news about the second wave,” said Shinichiro Kadota, senior currency strategist at Barclays.

Commodity currencies, which had been supported by the rally in oil and commodity prices, also took a hit.

The Australian dollar dipped slightly to $0.6859 after losing 0.90% the previous day while the Canadian dollar drooped to C$1.3642 to the dollar, not helped by Fitch’s downgrade of Canada’s sovereign rating.

The rating firm cut Canada’s rating to “AA+” from “AAA,” citing deterioration of the country’s public finances in 2020 because of the Covid-19 pandemic. 

Against the yen, the dollar also jumped back to 107.18 yen from a 1-1/2-month low of 106.075 touched on Tuesday.

The International Monetary Fund slashed its 2020 global output forecasts further as it sees deeper and wider damage from the pandemic than first thought.

It now expects global output to shrink by 4.9%, compared with a 3.0% contraction predicted in April, with U.S. output forecast to shrink 8.0%, a downgrade of more than 2 percentage points from the April forecast.

While massive stimulus by many governments have cushioned the blow from the pandemic, helping many companies survive lockdowns, investors fear a deeper recession would mean corporate income will not recover as quickly as they have initially hoped.

Bob Prince, Co-Chief Investment Officer of Bridgewater Associates, said U.S. stimulus efforts may be able to support corporate cash flows for the summer but that economic risk from the pandemic is likely to extend far beyond that.

Elsewhere, central banks in Turkey and Mexico are expected to cut interest rates later in the day to shore up their coronavirus-hit economies.

Ahead of the announcement, the Turkish lira was steady at 6.8509 to the dollar while the Mexican peso was a tad softer at 22.808 per dollar.

Source: Reuters

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