- After some people predicted that the dollar would weaken throughout the summer, the dollar recovered this week.
- “Until we get new information about vaccines, earnings, elections, and stimulus measures, the US dollar is the best safe haven.” Hayes
- (MUFG Bank) analysts also believe that if the US presidential candidate Biden performs poorly in the first presidential debate next week, it may cause trouble to the financial markets.
On Friday (September 25), after some people predicted that the dollar would weaken throughout the summer, the dollar recovered this week. It is currently up 0.26% to 94.61. It is expected that this week will have a more than a 2% increase. The biggest five-day increase since April. The technical picture shows that more gains are coming.
Earlier, after abandoning the U.S. dollar due to the Fed‘s easing policy, traders began to buy U.S. dollars again, causing short positions to be squeezed.
As the United States began to control the epidemic in some regions, the lack of liquidity, profit advantages, and alternative solutions rekindled investor interest.
Thomas J. Hayes, chairman of hedge fund Great Hill Capital LLC, said: “Until we get new information about vaccines, earnings, elections, and stimulus measures, the US dollar is the best safe haven.” “Previously, the US dollar may have touched in the short term.”
Coronavirus cases in Europe set a record, and the UK added London to the watch list of potential epidemic hot spots on Friday, which made investors more worried.
This has hit the optimism that European economic growth will substantially exceed that of the United States.
Kit Juckes, a chief foreign exchange strategist at Societe Generale, said, “The view that Europe’ behaves better’ than the United States has significantly weakened.” The general disparity in economic growth is “developing in a direction that benefits the United States.”
However, history warns us that the dollar is far from certain whether it will appreciate further. The dollar also rose in June, but as concerns about the global economic outlook faded, the dollar quickly gave up its gains.
T. Rowe Price portfolio manager Quentin Fitzsimmons wrote in a report that the Fed’s strategy of cutting interest rates over a longer period of time may also continue to “put pressure on the dollar”.
Interest rates: Although futures trends show that the Fed will maintain a policy rate close to zero until at least the end of next year, this is not as dovish as the negative interest rate policies adopted by the European Central Bank and the Bank of Japan.
According to data collected by Bloomberg, the US dollar’s 3-month interest rate is about 0.2%, which is second only to New Zealand and the highest among the Group of Ten.
If the Reserve Bank of New Zealand continues its plan to implement zero interest rates to support economic growth, the dollar is expected to dominate.
Lack of alternative currencies: This is another factor that benefits the dollar. Since the end of March, gold has risen by nearly 20%, more than the dollar, but gold does not provide income, and in some cases, it needs funds for storage.
The yen is another traditional safe haven, but the collapse of its positive correlation with stock market volatility shows that this status is waning.
Liquidity: Liquidity factors also support the dollar. According to a report by the Bank for International Settlements in April 2019, the average daily trading volume of the U.S. dollar is five times that of the yen and more than twice that of the euro.
At the height of the epidemic in March, investors rushed to buy U.S. dollars, causing the U.S. dollar exchange rate to soar, and borrowing costs in the foreign exchange swap market also rose sharply. This in turn prompted the Fed to cooperate with other central banks to increase the supply of dollars.
Tai Hui, chief Asian market strategist at JPMorgan Asset Management, said, “The market still has great confidence that when the market becomes very volatile, the U.S. dollar will become the currency of choice.” “Many investors are preparing for a period of time. During periods of increased volatility, this will push the dollar to strengthen.”
In the short term, analysts at TD Securities, looking ahead to key events next week, pointed out that with the first presidential debate next Tuesday, the market’s attention to the US election on November 3 may increase.
(MUFG Bank) analysts also believe that if the US presidential candidate Biden performs poorly in the first presidential debate next week, it may cause trouble to the financial markets.
Analysts said: “Due to increased concerns about the prospects of economic activity, the U.S. dollar rose against all Group of Ten (G10) currencies this week.
The increase will be the largest weekly increase since the first week of April, when the pandemic crisis After the outbreak, market volatility is still very high.
At present, the S&P 500 index has fallen by nearly 10% from its historical high on September 2, partly because the infection rate is still rising, the US economic activity is slowing, and the additional fiscal Stimulus has not yet been agreed.
The upcoming US elections are now likely to also play a role in reducing people’s risk appetite, and election risks are bound to escalate in the future.
The expectation of a sharp increase in foreign exchange volatility is understandable. In fact, This is easier to understand in the USD/JPY. In the absence of a final winner, uncertainty rises after the election, and the yen may clearly outperform the market.
The first TV debate next week is important. Nationally, Biden has a clear advantage over Trump. If Biden performs poorly next week, it may hurt the US dollar against the G10 core currency and benefit the yen.”