We have not seen such a strong week for the U.S. dollar since the 2008 global financial crisis. This fact alone explains why the greenback has been performing so well. There’s no doubt that the U.S. economy will be hit hard by COVID-19 but as a percentage of GDP, the rest of the world could suffer more. It will also be very difficult for smaller economies to recover if the U.S. is still in lockdown. California, Texas, New York and Pennsylvania have closed all non-essential businesses and collectively, they contribute 35% of U.S. GDP. The Dollar Index rose more than 3.3% this week as the euro tumbled 3.5%, the Japanese yen fell 2.25%, sterling dropped 4% and the Australian dollar plunged nearly 5%.
Over the past week, countries around the world have announced major fiscal and monetary stimulus. Their efforts helped markets stabilize towards the end of the week, but don’t expect these rallies to last. Jobless claims could spike to the millions next week, reflecting the damage COVID-19 has done to the economy. Mass layoffs and furloughs will have a damaging impact on retail sales and broader economic activity. With companies expected to report major losses in the first quarter, it will be extremely difficult for the relief rally in stocks to last.
For our readers, the main question is whether the U.S. dollar will retain its safe-haven bid and extend higher in the coming week. Our answer is yes it's possible, as long as there’s no intervention. From a monetary policy perspective, the Federal Reserve is running out of options, so we don’t see any big bazooka announcements next week that could threaten the U.S. dollar’s rally. They’ve already taken interest rates to zero, restarted QE and provided support for money market funds. President Donald Trump’s fiscal stimulus package could move through Congress quickly, and the progress could lift the dollar. There’s also very little market moving data on the calendar that could hurt the greenback. The main numbers to focus on will be durable goods, revisions to GDP and revisions to the University of Michigan Consumer Sentiment index.
The main risk for the U.S. dollar is G7 currency intervention. With the rise in the greenback driving many currencies to multi-year lows, central banks from Brazil to Norway have rushed to prevent further losses. There’s a very good chance that coordinated action on a global scale will be next. If they come into the market, it will be to sell dollars, not buy them. Individual central bank interventions rarely have a lasting impact on currencies, but shock-and-awe moves could temper the rise and calm equity markets.