The euro weakened on Thursday, as investors were unimpressed by the European Central Bank's stimulus measures to fight the economic fallout from the coronavirus outbreak, with investors flocking to the safe-haven dollar after the Federal Reserve said it will inject liquidity into a banking system showing signs of stress.
The ECB approved fresh stimulus measures on Thursday to help the eurozone economy cope with the growing cost of the coronavirus epidemic, but kept interest rates unchanged. "They (ECB) very much felt the pressure to at least do something because every other central bank is lowering interest rates or doing multi-policy fronts that will help banks and businesses," said Erik Bregar, head of FX strategy at Exchange Bank of Canada in Toronto.
A few hours later, the Federal Reserve Bank of New York said it will introduce $1.5 trillion in new repo operations this week and start purchasing a range of maturities as part of its monthly Treasury purchases in moves to stem panic caused by a market meltdown.
It offered $500 billion in a three-month repo operation on Thursday and will offer an additional $500 billion in one-month repo and $500 billion in three-month repo loans on Friday.
The move, though, hardly stabilized the currency and stock markets, as it further increased demand for US dollars. "We don't think this can turn around risk sentiment - it can't prevent the upcoming slowdown in consumption and economic activity," said Elsa Lignos, global head of FX strategy, at RBC Capital Markets in London.
"But it does mean that financial markets don't need to hoard liquidity in the way consumers have been hoarding tissue paper and pasta," he added. In afternoon trading, the euro fell 0.8% against the dollar to $1.1176. The dollar rebounded sharply against a basket of currencies after the ECB announcement, and held gains after the NY Fed announcement. The dollar index was last up 0.9% at 97.455.
Analysts said the dollar had rallied as swap spreads on major currencies blew out and investors scrambled for the US currency. The dollar had earlier struggled after US President Donald Trump banned travel from Europe to stem the coronavirus.
With the latest ban posing a fresh disruption to the global economy, traders were also disappointed by the lack of broad measures in Trump's plan to fight the pathogen, prompting traders to bet on further aggressive easing by the Federal Reserve. Fed funds futures on Thursday implied traders saw a 100% likelihood that the central bank's benchmark overnight lending rate will fall by at least another 75 basis points this month.
The dollar rose 0.9% against the Japanese currency to 105.49 yen, way above a four-year low on Monday. It also rose 0.8% against the Swiss franc to 0.9455. Trump announced on Wednesday a 30-day ban on travellers entering the United States from 26 European countries, effective from midnight on Friday.
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