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Dollar Surge Upends Currency Market With Dislocations Mounting

Susanne Barton
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Dollar Surge Upends Currency Market With Dislocations Mounting

(Bloomberg) -- The insatiable demand for dollars is causing disruptions in the global currency market.

The Bloomberg Dollar Spot Index extended its six-session winning streak Tuesday to touch the highest level in three years. While the dollar pared some of its gains in Asia trading Wednesday, its recent surge has still sparked staggering moves in other currencies.

The Australian dollar slumped to the lowest since 2003 and is heading for parity against its New Zealand counterpart, a level unseen since the 1970s. The loonie retreated to a four-year low, while the pound was the weakest since September. Only the yen and the Swiss franc managed to stay ahead of the dollar this month.

The funding crisis in financial markets has breathed new momentum into the dollar even after the Federal Reserve slashed rates twice this month. The surge in demand has pushed the premium for obtaining the greenback versus the euro on Tuesday to levels unseen since 2011. For Shaun Osborne at ScotiaBank, the dollar “is likely to remain strong while liquidity tensions persist.”

“Markets are not being driven by fundamentals - relative growth or interest rates,” said Osborne, Scotiabank’s chief FX strategist. “Movement is being driven by liquidity, volatility and credit issues. The impairments we are seeing across funding/lending/credit markets may persist.”

The liquidity crisis, fueled by the coronavirus disruptions, has forced nations to consider stimulus plans to support their economies. The Trump administration is discussing a plan of as much as $1.2 trillion in spending, while other nations including Australia, Canada and the U.K. have pledged a total of at least $1.14 trillion.

With entire economies under lockdown, there’s a risk that individuals and companies will not be able to meet their debt payments, driving those banks that are anticipating a slowdown in their loan businesses to hoard existing dollars, according to Alessio de Longis, who runs Invesco Oppenheimer’s Global Allocation fund.

In the current environment, de Longis expects to see continued dollar strength, but still remains bearish on the currency in the medium- to long-term. He favors the yen and the Swiss franc among G-10 currencies. And de Longis does not expect his views on the greenback will change anytime soon.

“We plan to stay the course as of now,” he said.

(Adds table, refreshes prices)

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