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US Dollar Drops As Federal Reserve Buys Individual Corporate Bonds

June 15, 2020 at 19:20 by Andrew Moran

Benjamin Franklin looks from a 100 dollar notesThe US dollar added to its losses toward the end of the trading session on Monday. The Federal Reserve announced that it would begin to purchase individual corporate bonds as part of its efforts to put together “a broad, diversified market index of U.S. corporate bonds.” The announcement eliminated the broader financial market’s losses and helped the leading stock indexes turn positive by as much as 2%.

According to a statement from the US central bank, the Fed would begin to scoop up individual corporate bonds as part of its $750 billion Secondary Market Corporate Credit Facility. This is in addition to the original scheme of acquiring corporate bonds through exchange-traded funds (ETFs).

The Fed listed guidelines to explain how it would add these corporate bonds to its balance sheet. The Eccles Building would buy individual bonds with remaining maturities of five years or less. The issuers must have been given ratings of BBB- or Baa3 as of March 22, right before the central bank announced its credit facilities. Issuers will not be required to complete the certification process to show that they are eligible for the purchases.

It said in a statement:

This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and other criteria. This indexing approach will complement the facility’s current purchases of exchange-traded funds.

As expected, corporate bond ETFs jumped on the news. The iShares $ Investment Grade Corporate Bond Fund surged 1.48%, for example.

Because the news sparked a rally in equities, the US dollar took a nosedive on the news. Investors shifted from the safe-haven asset to the broader financial market, highlighting their heightened risk tolerance. The US Dollar Index, which measures the greenback against a myriad of currencies, exacerbated its downward trend on late Monday. The index fell as much as 0.73%.

The USD/CAD currency pair tumbled 0.25% to 1.3556, from an opening of 1.3590, at 19:12 GMT on Monday. The EUR/USD rose 0.55% to 1.1319, from an opening of 1.1257.

If you have any questions, comments, or opinions regarding the US Dollar, feel free to post them using the commentary form below.

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