Dollar Slips Back on Stimulus Hopes

25 March, 2020

The U.S. dollar has traded lower Wednesday, as currency investors take comfort in the agreement reached over a hefty stimulus package by the U.S., and look to get into currencies perceived as more risky.

Senior Democrats and Republicans in the divided U.S. Congress said late Tuesday they had struck a preliminary deal on a $2 trillion stimulus package to limit the economic damage from the coronavirus pandemic. A vote on the relevant bill has been pencilled in for later Wednesday.

At 4:50 AM ET (0850 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 101.600, down 0.6% on the day and down over 2% from Monday's high. It's still up more than 2.5% for the month, however.

USD/JPY rose 0.3% to 111.52, but GBP/USD looked perky at 1.1893, up 1.2%, and AUD/USD rose 1.7% to 0.6067, gaining along with most so-called commodity currencies, amid increasing signs of an industrial revival in China that should underpin demand for Australian raw materials.

The dollar was also weaker against emerging currencies such as the rand and ruble, while central European currencies also clawed back recent losses against the euro.

The euro has also pushed higher against the dollar, with EUR/USD trading at 1.0831, up 0.4%, but its gains have been less pronounced, after the Eurogroup made only timid progress in rolling out the region's fiscal backstop, the European Stability Mechanism, at a meeting on Tuesday.

The group, which is made up of the finance ministers from the eurozone countries, dismissed the idea of joint debt instruments at the meeting. These would allow the measures needed to combat the coronavirus in the hard hit, but highly indebted, countries, like Italy and Spain, to be part financed by their richer neighbours.

While the ECB has come to the rescue by launching a gigantic new package of quantitative easing, it’s clear the extent to which individual countries can combat the pandemic depends on the strength of their balance sheets.

Germany offered up over 1 trillion euros to support its own economy earlier this week, but cash-strapped Italy has only managed a 25 billion-euro package.

This decision has seen increased pressure on the debt spreads of some of the eurozone countries against the benchmark German paper, and has weighed to a degree on the euro.

Europe has become the fiercest battleground in the war against the Covid-19 outbreak, and the news overnight from Italy was not encouraging. 

Italy’s daily number of fatal cases increased to 743 from 602 the day before, halting the recent trend of decreasing numbers of daily deaths. 

While the amount of daily new cases increased a smaller number than the day before, 3,612 versus 3,780, the total amount of critical cases has increased further (+3,393 vs +3,024), noted analysts at Nordea, in a research note, “which doesn’t bode too well for the amount of fatal cases over the coming days.”

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