Dollar bounces back as nervous investors stick with safety

London

THE dollar's rally gathered steam on Tuesday as nervous traders rushed to buy the most liquid currency amid fragile sentiment and signs of growing pressure in offshore dollar funding markets.

After coordinated moves by central banks failed to quell anxiety about the Covid-19 pandemic, investors are now waiting to see the scale of government fiscal responses to battle the economic fallout from the virus and limit the economic contraction.

Money managers and businesses are scrambling for dollars as the outlook grows darker by the day.

The US currency had initially fallen in early March as US government bond yields tumbled, but the dollar has since rebounded and measured against a basket of major currencies is now up 4.6 per cent in eight days.

Funding pressures in the market for dollars are growing sharply as investors and companies rush to get their hands on the greenback.

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"The biggest risk, and at the moment it's our bearish scenario, is that this morphs into a systemic crisis," said Guillermo Felices, a senior strategist and portfolio manager at BNP Paribas Asset Management.

Investors have taken central bank action as insufficient given the novel coronavirus's breakneck spread across the world, which has put many nations into virtual lockdown and sparked warnings about a brutal global recession.

The US dollar index on Tuesday rose 0.9 per cent to 99.050, its highest since Feb 27.

The euro dropped 1.1 per cent to US$1.1059 while sterling sank to its weakest since September, down one per cent at US$1.2141.

The dollar rallied 1 per cent versus the yen to 107 yen, reversing much of Monday's loss.

The Australian dollar, seen as sensitive to global growth due to the country's commodities exports, fell 1.5 per cent to a new 11-year low of US$0.6027.

Volatility has doubled in forex markets in the space of a few weeks, but has not been as pronounced in currency markets as it has in equities and bonds. Analysts said that despite the poor liquidity and large moves, trading had been relatively orderly.

Not everyone thinks the dollar's rally will last.

"Fixing the plumbing has tended to be one of the things that central banks can do in a crisis," said Kit Juckes, a strategist at Societe Generale. "So this period of renewed dollar strength, while likely to be sharp, is also likely to be short-lived."

Investors have been dumping emerging market currencies and MSCI's emerging market currency index dropped 0.5 per cent, its lowest since September 2018.

The Korean won hit its lowest since 2010 while the Russian rouble, Mexican peso and Indian rupee all fell again. REUTERS