Dollar rises but doubts about stimulus vote narrow gains

TOKYO: The dollar held gains against most peers yesterday as fresh declines in stocks accelerated the flight to cash, although it lost ground against the euro and yen as US lawmakers failed to pass a stimulus package to fight the coronavirus.

Legislators in Washington were unable to clear the stimulus measures on Sunday and a vote yesterday was ruled out as Republicans and Democrats tussled over the details of a proposed $1 trillion spending package. Some investors who had bet on a big stimulus vented their frustration by selling the dollar against the yen and the euro, but analysts warn this move is likely short-lived as the majority of investors unwind positions to hold cash.

“We’ve moved from risk off to a phase where major players are competing with each other for the safety of holding dollars in cash,” said Yukio Ishizuki, FX strategist at Daiwa Securities in Tokyo.

“There are still a lot of investors who need to sell riskier assets, and they want to hold their money in dollars.” Against the yen, the US currency bounced between gains and losses but last traded down 0.6 percent at 110.07.

The dollar initially rose against the euro to the strongest since April 2017 but then pared

gains to trade 0.4 percent lower at $1.0742 per euro. The common currency got a lift after European Central Bank Governing Council member Ignazio Visco said policymakers stand ready to take further steps if needed in response to the virus, which has paralysed Italy’s economy.

The ECB stunned investors last week by launching 750 billion euro emergency bond purchase scheme.

The greenback erased gains and fell 0.3 percent against the pound to $1.1694, pulling back from the strongest since at least 1985. US political uncertainty added to the tense mood in Asia.

Partisan battles in the Senate stopped a $1 trillion-plus coronavirus response bill from advancing on Sunday, but talks continued over Democrats’ demands for more funding for medical care and state and local efforts to combat the pandemic. The bill is Congress’ third effort to blunt the economic toll of a disease that has killed at least 420 people in the United States and sickened more than 33,000.

Nearly one in three Americans was ordered to stay home on Sunday to slow the spread of

the disease, while Italy banned internal travel as deaths there reached 5,476.

US President Donald Trump has approved disaster deceleration requests from New York and Washington, while St. Louis Federal Reserve President James Bullard warned unemployment could reach 30 percent unless more was done fiscally. Elsewhere, the dollar extended gains. It closed in on multi-year highs against the Australian and New Zealand dollars as the economic costs of self-isolation triggered the largest intraday decline ever in New Zealand shares.

Investors have been liquidating positions in safe-havens and other riskier investments to keep their money in dollars due to the uncertainty caused by the epidemic.

Major central banks have ramped up efforts to ease a global dollar funding crunch, but the U.S. currency remains in demand due to the high degree of uncertainty about the unknown flu-like virus.

Investors have to pay 86 basis points (bps) over interbank rates to swap 3-month yen into dollars, cross-currency basis swap rates showed yesterday. This is less than a 139 bps premium reached on March 19, but swap rates are still above average. The dollar has also surged against many emerging market currencies, highlighting the growing sense of risk aversion across the globe.

In Asian trading, the dollar rose to a record high against the Mexican peso and the highest since December 2018 against the Thai baht. So far this year, the dollar is up 26 percent against Brazil’s real , up around 11 percent against the Korean won and up 20 percent against the Indonesian rupiah.—Reuters