The U.S. dollar surged forward on Wednesday after two straight days of losses. As such, forex markets are tempering hopes of a fast global economic recovery. The greenback soared by more than 0.2% against a basket of currencies, as risk-off sentiment strengthened in early trading in Europe.
As a result, selling pressure hit several currencies, among them the sterling. The British pound declined by more than a third of a percent. The euro also lost some of the week’s gains, dropping by nearly 0.2%.
According to analysts, caution was warranted due to the risk of a second wave of coronavirus infections. This is true even though economic data is much improved.
Commerzbank analysts stated that the risk of a second wave of the pandemic had not been banished yet. It could quickly push the markets back into the old pattern, which basically means that risk aversion on the up, and everybody buying safe-havens, i.e., the dollar. Even if the governments impose lockdowns in that case they wouldn’t be as severe as the first time around.
What about the New Zealand dollar?
The New Zealand dollar dropped by almost 1% after the country’s central bank stated that the balance of economic risks remains on the downside. But the bank is ready to use additional monetary tools as necessary.
Despite losing, the U.S. dollar index is still up by more than 0.9% this week on an improving economic picture, with U.K., eurozone and U.S. data earlier in the week boosting riskier currencies at the expense of the safe-haven greenback.
The International Monetary Fund will release revised global growth projections in its World Economic Outlook update later on Wednesday. This could give investors an idea of the extent of coronavirus’ economic damage and the likely recovery pace.
According to the IMF’s last forecasts in April, the world GDP would fall by 3% in 2020. For now, traders watch surging coronavirus cases in the United States, Germany, and elsewhere closely.