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US dollar slips as Fed's money bazooka raises hopes of easier cash supply
[TOKYO] The US dollar slipped on Tuesday on signs tight funding conditions are easing slightly after the US Federal Reserve pulled out all stops to supply much-needed greenback liquidity.
The Fed announced unlimited quantitative easing and programmes to support credit markets on Monday in a drastic bid to backstop an economy reeling from emergency restrictions on commerce to fight the coronavirus.
"We seem to have got out of a phase where everything from stocks to safe assets such as bonds and gold were sold," said Koichi Kobayashi, chief manager of forex at Mitsubishi Trust Bank.
"The dollar funding conditions are easing slightly, compared with a week ago, though I wouldn't say things are normal. While the Fed is pumping dollars, we still need to wait and see if that money will flow to every corner of the economy."
The dollar index lost about 0.5 per cent to 101.64, slipping further from Friday's peak of 102.99, its highest level since January 2017.
Against the yen, the dollar shed 0.6 per cent to 110.58 yen, having hit a one-month high of 111.59 in the previous session.
The euro gained 0.9 per cent to US$1.0821, bouncing back from a near three-year low of US$1.0636 in the previous session.
The British pound also rose 0.75 per cent to US$1.1630, up more than two cents from its 35-year low of US$1.1413 set last week.
The Fed, which has already expanded its balance sheet to a record level, undertook unprecedented measures to extend its "lender of last resort" power beyond Wall Street to Main Street and City Hall.
It announced various programmes including purchases of corporate bonds, guarantees for direct loans to companies and a plan to get credit to small and medium-sized business.
"I think the measures taken by the Fed are powerful and should help ease the crisis," Peter Cardillo, chief market economist at Spartan Capital in New York, told the Reuters Global Markets Forum.
"However, the markets seem to want more. I suspect once the Congress passes the economic stimulus package, it should stabilise the equity markets."
The radical steps came after US money markets seized up as a broad set of market participants, from big multinational carmakers to small shop owners, hoarded dollars fearing a slump in cashflow during lockdowns in their countries.
While the Fed's move is likely to mitigate the blow for many companies in the long-run, investors remained on edge amid uncertainty about the extent of the pandemic.
Coronavirus cases continued to rise exponentially in many countries, raising worries about the lack of hospital beds in some areas.
Wall Street's slide deepened on Monday as the rapidly spreading coronavirus forced more US states into lockdown while Washington's fiscal stimulus package remained stalled in the Senate.
"The market is still nervous about possible moves to cash everything, including unwinding of existing derivative positions," said Kyosuke Suzuki, director of forex at Societe Generale.
The three-month dollar/yen currency basis swap spread, seen as the market premium demanded for swapping yen for dollar, stood at 0.80 per cent, down from a peak of around 1.4 per cent last week but still far above normal levels around 0.2-0.4 per cent.
The premium persisted even after banks borrowed a record amount of dollars from the BOJ.
Trading remained volatile, with the Australian dollar rose 2.0 per cent to US$0.5952, extending its recovery from a 17-year low of US$0.551 touched last week.
The Mexican peso and the South African rand jumped more than 1 per cent and many emerging market currencies gained too.
Market players are looking to a raft of business sentiment surveys in Europe due later in the day for a glimpse of how the virus is affecting the real economy.