Safe-haven dollar on course for best week in six months

Risk currencies stabilised on Thursday, in a week where most have sold-off sharply versus the US dollar amid
fears regarding tighter virus restrictions put in place across much of Europe.

Despite a bit of a retracement, the dollar remains on course for its best week in six months in trade-weighted
terms as investors pile into the currency due to its safe-haven status. Whether or not this recovery rally in the
greenback can be maintained may depend a lot if authorities in the Euro Area can get the second wave of
infections under control. The US government’s ability to force through more economic stimulus before
November’s presidential election may also prove key. There was slightly more upbeat news on that front
yesterday, with Treasury Secretary Mnuchin saying that he would resume talks with House Speaker Nancy
Pelosi regarding another relief package.

Attention this week has been heavily on central bank speakers. FOMC chair Powell spoke again during his
testimony to Congress on Thursday, although his remarks were very similar to previous communications as he
called on the US government to further support the economy. The most noteworthy comments probably came
from Fed member Bullard, who noted that he thought the US economy may make a full recovery by the end of
2020. This is a highly optimistic appraisal not shared by the majority of his peers, so the dollar took little notice.

Meanwhile, US housing data out on Thursday was highly encouraging, pointing to robust levels of demand
within the sector. Sales jumped by another 4.8% in August, with more than one million new homes purchased
last month – the most in a single month since 2006. This probably has much to do with record low
borrowing rates. A similarly impressive reading from this afternoon’s durable goods order data would be
another positive sign and could provide impetus for another move higher in the dollar.

Sterling outperforms as Sunak unveils Job Support Scheme

Sterling has been one of the better performing major currencies in the past two or three days, in part due to
the UK government’s announcement of more fiscal stimulus. The UK’s new Job Support Scheme will replace
the existing furlough programme on 1st November and will run for at least six months. Rather than a like for
like replacement, this will involve the government topping up salaries for workers whose employees are only
able to bring them back part-time.

Markets largely overlooked comments from Bank of England governor Bailey who said that the central bank
was exploring whether the use of negative interest rates would be a successful and viable option in the UK.
This is largely in line with what Bailey has announced in the last couple of MPC meetings, so came as no real
shock to investors.

2020-09-25T08:56:41+00:00 September 25th, 2020|