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US Dollar Weakens As Currency Crunch Subsides, Housing Data Disappoints

June 22, 2020 at 16:38 by Andrew Moran

One cent coin stands on 100 dollar notesThe US dollar is weakening to start the trading week as the global currency crunch appears to have subsided. Housing data was also released on Monday, creating concern that the real estate market may not fully recover in the aftermath of the coronavirus pandemic. Is the greenback set for a bear market in the second half of 2020?

Last week, it was announced that the major central banks reduced the frequency of dollar swaps as the currency crunch decreased. The Bank of England (BoE), the European Central Bank (ECB), the Swiss National Bank (SNB), and others tapped the fewest amount of dollars since the program was launched in April. The move was made in consultation with the Federal Reserve.

According to Fed data, the balance of the US central bank’s foreign exchange swaps with its counterparts tumbled by $92 billion to $352.5 billion, which is the lowest since the beginning of April. This was the primary factor in the Eccles Building’s surprise drop in the balance sheet.

This indicates that the demand for the Fed’s emergency liquidity facilities is dissipating. It also shows that global financial markets are returning to a semblance of normalcy since the madness in March when there was a huge demand for dollars.

Overall, this might lessen dollar-funding pressures. The cost to access dollars to fund transactions will inevitably decrease. Plus, this could make foreign demand for Treasurys even more appealing, particularly the long-dated bonds.

Despite proof that the US dollar is still the currency-of-choice for investors in times of panic, not everyone is convinced this will be the case forever. Deutsche Bank thinks America’s currency demand as an “emergency dollar” will eventually wane due to “multiple cross-currents.” Deutsche Bank’s Sameer Goel, who is chief Asia macro strategist, told CNBC that a second coronavirus wave could impact the US greatly. If not the greenback, then what currency would investors hold in a crisis?

The Chinese yuan.

We’ve seen yuan being relatively sort of stable and within a range, and that is partly to do also with … a lot of dividend payments and the fact that obviously there was a lot of noise along the U.S.-China axis as well. Of late, we have seen that it feels like at least the phase one trade deal seems largely secure, for now.

I think all that does give you a little bit of a window here for potentially, the (yuan) to trade sort of stronger versus the dollar and potentially through 7 as well.

In economic data, existing home sales plunged 9.7% in May, up from the 17.8% drop in April. The market had penciled in a reading of -3%, according to the National Association of Realtors. But while this is causing some consternation about the housing market’s rebound in the fallout of COVID-19, the industry thinks that the US may have already reached the bottom.

The US Dollar Index, which measures the greenback against a myriad of currencies, fell 0.56% to 97.08, from an opening of 97.66. The index has erased all its gains in 2020, but it did squeak out a 0.4% weekly gain last week.

The USD/CAD currency pair tumbled 0.48% to 1.3545, from an opening of 1.3608, at 16:27 GMT on Monday. The EUR/USD rose 0.72% to 1.1260, from an opening of 1.1179.

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