US dollar continues slide as Fed stimulus calms markets

London

THE US dollar fell broadly on Tuesday, sliding for a second consecutive day after the US Federal Reserve stepped up measures to shield an economy reeling from emergency restrictions on commerce to fight the novel coronavirus.

Against a basket of its rivals, the US dollar fell 1 per cent to 101.04, down more than 1.5 per cent from Monday's highs and having hit a more than three-year high of 102.99 on Friday. It was on track for its biggest single-day drop in three weeks.

"The Fed's measures are unprecedented and they have been extremely proactive in preventing this external shock from morphing into a wider funding crisis," said Vasileious Gkionakis, head of FX strategy at Lombard Odier.

The Fed announced various programmes including purchases of corporate bonds, guarantees for direct loans to companies and a plan to get credit to small and medium-sized business.

While the Fed's latest measures were seen to have effectively broken the spreading freeze in the dollar funding markets in the short-term, the shock to the real economy is expected to last for a far longer period with latest PMI data offering a glimpse of the pain.

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Ulrich Leuchtmann, head of FX and commodity research at Commerzbank said in a note that as more economies enact draconian measures to lock down their economies, the global economy would be massively constrained in the near future and markets could quickly turn back into risk-off mode.

Business activity collapsed from Australia and Japan to Western Europe at a record pace in March as nations locked down to curb the spread of the disease, shuttering shops, restaurants and offices.

IHS Markit's flash composite Purchasing Managers' Index (PMI) for the euro zone, seen as a gauge of economic health, plummeted to a record low of 31.4 in March, its biggest one-month fall since the survey began in mid-1998.

Notwithstanding the collapse in the real economy, the euro surged on Tuesday with traders reporting demand from insurance firms and asset managers on expectations the latest round of stimulus would calm panicky markets.

Against the US dollar, the single currency jumped 1.5 per cent to US$1.0880, a three-day high.

JP Morgan strategists said in a daily note the repeated rounds of stimulus from global policymakers indicate that signs of infection or death rates peaking in the most troubled areas could fuel some demand for risky assets. REUTERS