Dollar rallies as investors brace for global downturn

London

THE dollar rallied against riskier currencies on Wednesday, with markets staring at what looked likely to be one of the worst economic contractions in decades as the world confronts the novel coronavirus pandemic.

The dollar advanced against the euro, sterling and most other major currencies as selling in global shares highlighted growing risks from the pandemic that has shown little sign of abating. The dollar's status as the world's reserve currency makes it a natural safe haven, as evidence builds of a massive global economic downturn.

German and British factory output gauges on Tuesday slumped to multi-year lows, painting a similarly bleak picture to manufacturing data from Japan and South Korea overnight.

Further surveys due from the United States are expected to do little for investor confidence. The country's private employment data is likely to show a drop in payrolls.

The dollar was up 0.6 per cent against a basket of currencies on Wednesday and up nearly 1.5 per cent since Monday. It remains below multi-year peaks reached last month, before the Federal Reserve pumped more dollars into the system.

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Analysts say coordinated action by central banks to boost dollar supply has helped calm the rush into the dollar and extreme volatility, but money markets still need time to settle.

"The dollar has regained some lost ground over the last couple of days, but the FX market needs more time before it works out where it is," said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank. "We are still seeing some abnormal US dollar funding and I think the fundamentals are very difficult to work out. We have seen some manufacturing PMIs today, but we are still in a situation where it's difficult to interpret these numbers." The euro fell nearly 1 per cent against the dollar, dropping below US$1.10.

A slew of currencies - including the Australian, New Zealand and Canadian dollars, along with the South African rand - were down around 1per cent versus the greenback.

Sterling fared slightly better, last down 0.4 per cent at US$1.2370.

The Japanese yen - seen by investors as a safe bet - was one of the few currencies to hold its ground against the dollar. It was last flat at 107.530 yen, as even the Swiss franc fell 0.6 per cent.

The Fed on Tuesday broadened access to dollars for dozens of foreign central banks.

"Markets appear to have transited through stage 1, the value-at-risk position clearing (though some stragglers may remain), and there are increasing signs the stage 2, the 'mad dash for cash' and certainty has run its course and is partially unwinding," analysts at Barclays said in a note. "We now are in the early days of stage 3 where markets struggle with assessing fundamental direction amid still staggering uncertainty." REUTERS