On Tuesday, the dollar slipped for a second consecutive day after the U.S. Federal Reserve disclosed the latest measures to supply valued liquidity into funding markets, resulting in vulnerable currencies such as the Australian dollar surging.
‘Waiting to see the money flow’
On Monday, the Fed declared unlimited quantitative easing and programs to aid credit markets in a quick bid to backstop an economy fighting from emergency restraints on commerce to combat the coronavirus. Against a bucket of its competitors =USD, the dollar dropped 0.5% to 101.52, down over 1% from Monday’s gains and having reached a more than three-year high of 102.99 on Friday.
“The dollar funding conditions are easing slightly compared with a week ago, though I wouldn’t say things are normal. While the Fed is pumping dollars, we still need to wait and see if that money will flow to every corner of the economy,” said Koichi Kobayashi, chief manager of forex at Mitsubishi Trust Bank.
While the latest measures of the Fed were observed to have efficiently broken the widening freeze in the dollar funding markets in the short-term, the hit to the real economy is expected to sustain for a far longer period with the latest PMI data providing a peek of the pain.
Japan posted its largest-ever services sector fall and factory activity squeezed at its fastest in ten years, consistent with a 4% economic contraction this year. The same was the case with Australia.
The head of FX and commodity research at Commerzbank, Ulrich Leuchtmann stated in a note that as more economies adopt the draconian measures to shut down their economies, the global economy would be hugely constrained in the coming future and markets could quickly turn back into risk-off mode. However, in early London trading, battered currencies rallied.
The euro managed to gain 1% to $1.0834 EUR=EBS, fighting back from a near three-year low of $1.0636 in the previous session.
The British pound also increased by 0.9% to reach $1.1650 GBP=D3, up more than two cents as compared to its 35-year low of $1.1413 set last week.
The Fed declared several programs including purchases of corporate bonds, guarantees for direct loans to companies and a plan to get credit to small and medium-sized businesses.
Trading persisted to be volatile, with the Australian dollar surging by 2.0% to $0.5952 AUD=D3, exhibiting its recovery from a 17-year low of $0.5510 touched last week.
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