Daily Outlook

Dollar’s Best Streak Since 2012 Is Over, Showing Stress Easing

Traders around the world dumped the dollar in favor of risk assets as moves by U.S. leaders to support the world’s largest economy spurred relief across markets hampered by liquidity strains.

The Bloomberg Dollar Spot Index declined 0.6%, ending a 10-day rally that took it to the strongest level on record after the Federal Reserve announced unprecedented stimulus. The index earlier fell as much as 1.5%, the most since 2016 on a closing basis. Treasuries fell and stocks around the world surged on signs U.S. leaders are close to reaching a consensus on a spending bill to boost the economy.

Norway’s krone led gains against the greenback, jumping the most on record before paring. Australia’s dollar extended a rebound from a multi-year trough and the pound rose as much as 2.2%, even after the U.K. entered a full lockdown to contain the coronavirus. An index of emerging-market currencies was on course for its biggest advance in more than three years, a positive development for borrowers with debt in the U.S. currency.

The relief sweeping over markets is in stark contrast to last week when investors sold almost everything but the dollar amid the growing fallout from the virus. A slew of emergency measures from major central banks including Japan and Australia failed to calm markets, with the worries centered on a liquidity crunch.

Those pressures now seem to be moderating. In the latest move on Monday, the Fed said it would buy an unlimited amount of government bonds to keep borrowing costs low and expand its Money Market Mutual Fund Liquidity Facility. It had earlier extended its dollar-liquidity swaps to other policy makers including those in Australia and Brazil.

Meanwhile, the spread between more liquid current bonds, known as “on-the-runs” and older so-called off-the-run securities has tightened. Still, strains in funding markets remain, and options traders aren’t convinced that the dollar’s retreat will mark a complete turnaround in sentiment. The premium to go long the dollar over the next month versus its major peers still trades near its highest in eight years.

Dollar’s Best Streak Since 2012 Is Over, Showing Stress Easing, Bloomberg, Mar 25

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