Dollar snaps losing streak as investors opt for safety

London

THE dollar snapped a week of declines on Monday and rallied against major currencies and riskier emerging markets as investors braced for prolonged uncertainty and governments tightened lockdowns to fight the coronavirus.

China's offshore yuan fell after the Chinese central bank cut a key interbank interest rate. The euro, sterling and Aussie dollar were all down 0.5-1 per cent in London trading, bringing an end to recent rebounds that followed the Federal Reserve's efforts to calm the rush to own the US currency earlier this month.

Concern about the spreading coronavirus and the economic impact of shutdowns continued to dominate foreign exchange markets, but price moves on Monday were relatively well-contained and much smaller than in recent sessions.

"I think you have to say that risk is still high," said Adam Cole, a currencies strategist at RBC Capital Markets.

He said markets needed to see "broader evidence of a peak in infections" before calm returned and otherwise risked more "brutal selloffs periodically". The dollar index rose as much as 0.7 per cent to 98.992, putting it back at Friday's trading levels.

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Analysts said investors' end-of-month portfolio rebalancing as well as nervousness about the virus was also supporting the dollar.

The euro dropped 0.6 per cent to US$1.1069. Sterling weakened as much as 1 per cent to US$1.2318 before rebounding above US$1.24.

Over the past two weeks, the dollar first posted its biggest weekly rise since the 2008 financial crisis as investors and companies rushed into the world's most liquid currency, then saw its biggest weekly drop since 2009. Signs of funding stress have eased but not abated and hard-dollar cash remains in high demand.

"The magnitude and breadth of US dollar gains suggest that financial markets have become seriously impaired. So the US dollar may now become a barometer of the efficacy of the policy response to corporate credit difficulties, interbank funding challenges, etc," Standard Chartered analysts said in a research note.

The safe-haven Japanese yen rose marginally to 107.87 yen per dollar.

The dollar gained 0.4 per cent versus the offshore Chinese yuan to 7.1132 after the People's Bank of China unexpectedly cut a key interbank interest rate, the seven-day reverse repurchase rate, by 20 basis points. The Australian dollar dropped sharply before recovering to trade down 0.5 per cent at US$0.6141. REUTERS