The US dollar rallied across the board on Thursday, as worries about the economic fallout from the coronavirus boosted dollar demand despite recent steps by world central banks aimed at alleviating market stress. The dollar index, which measures the greenback's strength against a basket of six other major currencies, rose 2.0% to 102.73, its highest level since January 2017. The index is up about 4% for the week.
"The dollar's rampage continues into another session today in FX markets, focusing on the G10 currencies that previously performed well amidst the market turmoil," said Simon Harvey, a London-based market analyst at Monex Europe. The euro was 2.15% lower against the dollar. Against the Swiss franc, the greenback was up 1.9%, while it gained 2.63% against the yen.
"The dollar's strength is, in effect, a powerful short-covering rally," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "It was used to fund a great part of the global circuit of capital. The circuit of capital is in reverse now, and the funding currency is being bought back." The dollar's rally has crushed several currencies to multi-year lows. The euro was at its weakest since April 2017, as traders rushed to dump euro positions despite a fresh round of stimulus from the European Central Bank.
The European Central Bank announced a 750 billion euro ($817 billion) asset-purchase programme in response to the coronavirus outbreak. "While the ECB's announcement has helped the bond market, it has done little for the euro," said Chandler.
The ECB's purchase scheme, announced after an emergency meeting late on Wednesday, came less than a week after policymakers launched fresh stimulus measures. The fall in the euro mirrored a sudden widening in FX implied borrowing costs for the US dollar, indicating that investors were rushing to secure their short-dated funding. "There are still fears about refinancing of European debt in US dollars," said Ulrich Leuchtmann, Ulrich Leuchtman, head of FX strategy at Commerzbank in Frankfurt.
"The swap facilities should normally give access to euro funding," he said. "But I think this is not calming down the market. There's a general assumption that there are a lot of US funding needs, not just in Europe but also around the world as a whole." Though global central banks have pumped in billions of dollars in emergency liquidity injections in recent days and strengthened swap lines with some global central banks, dollar funding pressures remained exacerbated across the board.
Investors are selling what they can to keep their money in dollars due to the unprecedented amount of uncertainty caused by the coronavirus pandemic, which threatens to paralyse the global economy. The US Federal Reserve opened the taps for central banks in nine new countries to access dollars in hopes of preventing the coronavirus outbreak from causing a global economic rout. The dollar pared gains just before the Fed announcement.
"Having this FX swap line is going to be pretty important down the line. But from a confidence point of view, when that has been impacted it's really hard to have normalized reaction functions," said Mazen Issa, senior currency strategist at TD Securities in New York. The British pound fell 0.72% even as the Bank of England cut interest rates to 0.1% and ramped up its bond-buying program.
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