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Asia’s Currencies Rally, Casting Doubts Over Dollar Haven Status

Chester Yung, Ruth Carson and Vassilis Karamanis
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Asia’s Currencies Rally, Casting Doubts Over Dollar Haven Status

(Bloomberg) --

Everyone’s favorite haven currency is having a rough day.

The dollar is down against most Group-of-10 and Asian peers, including the yuan in China, where the coronavirus originated. It’s being weighed down by rising speculation among investors that the U.S. will lower borrowing costs this year.

Money markets are pricing in about 75 basis points of Federal Reserve cuts this year, up from 66 basis points Wednesday, including a quarter-point decline in interest rates by the end of April.

Dollar investors’ nerves weren’t soothed by Donald Trump’s assurances that his administration is prepared to deal with a coronavirus outbreak. That’s adding to concern the U.S. may be headed for a contentious election, especially as Bernie Sanders establishes himself as a Democratic presidential front-runner.

“Bearing in mind that the market is currently holding long dollar positions, speculation of lower Fed interest rates has the capacity to take some steam out of its current buoyant tone,” said Jane Foley, a senior foreign-currency strategist at Rabobank. “This may strengthen the safe haven status of the yen and the Swiss franc in the near term.”

The U.S. Centers for Disease Control and Prevention reported a first case of an infected person with no known links to an existing virus outbreak.

Reality Check

But bearishness on the currency is being curbed by demand for U.S. Treasuries, even with yields at record lows. And, as ever, the dollar has an edge over its peers by being the world’s reserve currency of choice.

Even with the decline on Thursday, a gauge of the the greenback has advanced about 1.4% in February, and is headed for its best month since July. Strategists at Bank of America have raised their forecasts for the greenback’s strength against the euro, pound and Australian dollar.

The breather in the dollar’s rally was in contrast to gains in the battered Thai baht, the Philippine peso and the Chinese yuan, which rose at least 0.2%. The exception was the Indonesian rupiah, which tumbled to a two-month low as global funds continued to sell the nation’s bonds.

“The currencies which saw significant carnage earlier on are showing some signs of stabilization,” said Yanxi Tan, a strategist at Malayan Banking Bhd. “But for currencies such as the rupiah, which has escaped unscathed earlier, markets are fearful of a nasty surprise if sudden contagion is announced, and doubts are growing on this front.”

The caveat is that the rebound in Asian currencies may simply be bargain-hunting after weeks of relentless selling, with some optimistically pointing to a slowdown in virus cases in China.

G-10 Peers

While the dollar wobbles, the euro is heading for its best week since October, rising more than 1%. Options traders are positioning for even more gains, betting that emerging-market carry trades will unwind further. They’re also optimistic about the chances of fiscal stimulus in the euro area after German Finance Minister Olaf Scholz said he’s considering easing a restriction on the country’s debt level.

And the Swiss franc has maintained its haven status, rising almost 1% against the dollar in the past four days, on course for its best week since early December.

In the long run, the dollar’s haven status is intact, “given its function as a transaction currency, liquidity and positive yield,” Foley said. “Consequently in our view, the dollar is unlikely to yield too much to the euro in the current environment.”

(Disclaimer: Michael Bloomberg is seeking the Democratic presidential nomination. He is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

(Updates throughout.)

--With assistance from Neha D'silva.

To contact the reporters on this story: Chester Yung in Singapore at kyung33@bloomberg.net;Ruth Carson in Singapore at rliew6@bloomberg.net;Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Dana El Baltaji, Neil Chatterjee

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