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Forex - Dollar Surges vs Higher-Yielders, Fades vs Havens

Published 02/28/2020, 04:11 PM
Updated 02/28/2020, 04:27 PM
© Reuters.

By Geoffrey Smith

Investing.com -- The dollar was higher against high-yielding currencies but lower against havens in early trade in Europe on Friday, as the week-long flight to safety in global markets continued unabated.

Overnight, the greenback had marched to another new 10-year high against the Aussie dollar and also breached 1.60 against the kiwi for the first time since October.

However, its gains against European currencies were more limited, with the euro staying around $1.1000 and Sterling dropping only 0.2% to $1.2864. And it lost ground against traditional safe havens such as the Japanese yen and Swiss franc.

The pound was supported by stronger-than-expected consumer confidence data for February and the fastest annual gain in house prices since August 2018, as measured by the Nationwide Building Society.

The data are consistent with other recent high-frequency indicators suggesting an uptick in the economy since December’s general election. However, the fast-deteriorating global backdrop and the new government’s defiant stance vis-à-vis the EU as it starts negotiations on a free trade deal may yet keep hopes of a near-term rate cut by the Bank of England alive.

The Bank of England’s chief economist Andrew Haldane may give further clues on the likelihood of that in a speech at 6:15 AM ET (1115 GMT).

Markets are now aggressively pricing in monetary easing from the Federal Reserve over the next few months. The Fed-sensitive 2-Year yield fell through 1% in early trading in Europe, while the 10-year yield has collapsed from 1.47% at the start of the week to a record low of 1.19% by 3 AM ET (0800 GMT).

“Markets are trying to “price-in” an event for which there is no readily known precedent. Volatility will rule until COVID-19-related risks reverse course,” said John Lonski, chief economist with Moody’s Capital Markets Research, in a note to clients.

However, he warned that “by themselves, Fed rate cuts will not remedy the COVID-19 virus. What the Fed can do is help to facilitate access to financial capital for those households, businesses and local governments that incur cash flow problems owing to the virus. The Fed will attempt to prevent a highly communicable virus from sparking a ruinous bout of financial contagion.”

Fed rate cuts would also be a significant help to emerging market countries whose currencies have depreciated fast against the dollar since the outbreak began. The worst hit continue to be those with the biggest trade links to China: the dollar rose 2% against the Indonesian rupiah in Asian trading to an eight-month high, while it also rose more than 1.6% against the Russian ruble to its highest since January 2019.

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