The European currencies rallied in the recent trade after the U.S. dollar fell. The euro soared by 1% to $1.0834, recovering from a near three-year low of $1.0636 in the previous session. The British pound also rose by 0.9% to $1.1650 after falling to its 35-year low of $1.1413 last week.
However, Asian currencies stay in the red. Japan announced its biggest services sector decline as the country’s factory activity collapsed. According to reports, Australia is enduring a similar downfall.
Ulrich Leuchtmann, the Head of FX and Commodity Research at Commerzbank, stated that the global economy will be massively constrained in the near future as more countries enact draconian measures to lock down their economies. He also added that the markets could quickly turn back into risk-off mode.
What caused the U.S. dollar’s recent downfall?
The dollar lowered by 0.5% to 101.52 against a basket of other currencies, falling more than 1% from Monday’s highs. The greenback hit a three-year high record of 102.99 on Friday. But the rally was short-lived.
The U.S. Federal Reserve announced new measures to supply precious liquidity into funding markets, causing the U.S. dollar’s collapse and sending risky currencies such as the Australian dollar soaring. The agency is trying to backstop an economy reeling from emergency restrictions used to fight the coronavirus.
According to Koichi Kobayashi, Chief Manager of Forex at Mitsubishi Trust Bank, the dollar funding conditions are easing slightly versus a week ago. He also declared that things aren’t normal yet. While the Fed is pumping dollars, investors have to wait and see if that money will flow to every corner of the economy.
It seems the Fed’s latest measures have effectively broken the spreading freeze in the U.S. dollar funding markets in the short-term. However, analysts expect that the shock to the real economy will last for a far more extended period.
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