(Bloomberg) -- It’s taken unprecedented measures from governments and central banks the world over to bring the frenzied rush for dollars under control. A simple matter of calendar dates could help set it off again.
In the coming days, a massive allocation shift will take place as portfolio managers and corporate treasuries gear up for quarter-end, an event which often feeds into greenback strength. The worry on Wall Street is that it threatens to help reignite dollar demand and make the currency’s three-day losing streak through Thursday more of a pause than lasting pullback.
Already, rounds of Federal Reserve monetary support and a $2 trillion U.S. fiscal package in the works have failed to stamp out global dollar hoarding. Throw in a looming barrage of economic data that’s certain to be dire and it adds up yet more appreciation for the world’s reserve currency.
“We don’t think we’ve found a bottom in this crisis yet or the highs in the U.S. dollar,” said Zach Pandl, co-head of global currency and emerging-market strategy at Goldman Sachs Group Inc. “Given the sudden stop in the economy there could be some sticker shock around the incoming data over the next couple of weeks. The dollar will continue to benefit from safe-haven flows and other forces that have been lifting it.”
Thursday’s unemployment claims number was the first major data point to really show the unfolding hit of the virus to the largest economy. Claims surged to a record 3.28 million in the week ending March 21 from 282,000 a week earlier.
At the same time the extent of virus damage starts to show in data, Wells Fargo & Co. reckons the recent plunge in equities has left pension-fund portfolios so far out of balance that it will force them to dump about $40 billion in Treasuries and other debt before the month is out.
Even ignoring quarter-end, JPMorgan Chase & Co. was predicting pension and other investment funds would have to shift billions into equities to counter the historic rout.
These kinds of flows can create turmoil for currencies. The forum overseeing conduct on the $6.6-trillion-a-day foreign-exchange market warned on Thursday volatility may surge in the coming days.
“At the end of every month and even more so the end of every quarter, we tend to see strong corporate demand for the U.S. dollar,” said Athanasios Vamvakidis, head of G-10 foreign exchange strategy, Bank of America Merrill Lynch. “This seasonality is strong on our flows, particularly for end-quarter. Having said that, the global crisis may be a more important dollar driver now.”
The U.S. economic stimulus package is bigger than any seen before, but the fear in some corners is it may still fall short of what’s needed to prop up companies and Americans hit by the pandemic. Containing the outbreak has forced the economy to a sudden stop. Gross domestic product estimates vary wildly, but some economists project the worst drop in quarterly records dating back to 1947.
The dire outlook helped drive extreme moves earlier this quarter, and for some that means quarter-end flows could actually wind up capping dollar strength. The Bloomberg Dollar Spot Index dropped 0.9% as of 10:20 a.m. in New York, heading for a third day of declines after notching 10 gains in a row.
Nikolaos Panigirtzoglou at JPMorgan says so many corporations and investors dived for the greenback as equity, credit and rates markets all crashed at once that flows inevitably have to come back the other way. Meanwhile, the Fed actions have relieved some of the strains that had been driving greenback strength.
“Quarter-ends sometimes sees funding squeezes and tend to benefit the dollar as a result but this is usually in September or December,” the strategist said. “This time the central bank backstops are so huge that I envisage no funding issues into quarter end. The opposite.”
The Fed has already expanded and extended its dollar swap lines to foreign central banks, and backstops both the money-market mutual fund and commercial-paper markets where businesses turn for short-term credit.
Yet despite a raft of actions drawn from the 2008 playbook, it is still struggling to meaningfully move the needle in the shortfall in dollar funding.
Sebastien Galy, senior macro strategist at Nordea Investment Funds SA in Luxembourg, sees the dollar rising to levels lofty enough to spark U.S. intervention to weaken it, even though he expects any such action to be unsuccessful. Goldman’s Pandl also has raised the specter of intervention.
“The reality is the U.S. might intervene just to make a point even as it’s hugely inefficient as a tool,” Galy said. “The dollar relative to most of the rest of the world is probably going to remain relatively stable.”
The pandemic continues to spread, raising the prospect of more safe-haven flows. Cases worldwide have topped 480,000 and the U.S. death toll has climbed above 1,000.
“We are still going to get a series of horrible economic numbers and that will send more flows into the dollar, even given possible quarter-end rebalancing effects,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “With over $12 trillion in global credit and supply chains funded in dollars, the monetary and fiscal support isn’t enough to end the demand.”
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