U.S. Dollar Fell After the Rally. What Caused its Downfall?

The dollar collapsed on Tuesday after the U.S. Federal Reserve announced new measures to supply precious liquidity into funding markets and sending risky currencies such as the Australian dollar soaring.

The Fed made a declaration of unlimited quantitative easing and programs to support credit markets on Monday. The agency is trying to backstop an economy reeling from emergency restrictions used to fight the coronavirus.

The dollar fell 0.5% to 101.52 against a basket of other currencies, lowering by more than 1% from Monday’s highs. Before that, the greenback hit a three-year high record of 102.99 on Friday.

Koichi Kobayashi, Chief Manager of Forex at Mitsubishi Trust Bank, stated that the dollar funding conditions are easing slightly versus a week ago. However, he doesn’t think things are 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, declared Kobayashi.

The Fed’s latest measures have effectively broken the spreading freeze in the U.S. dollar funding markets in the short-term. But analysts expect that the shock to the real economy will last for a far more extended period.

How do the other currencies fare?

The euro rose by 1% to $1.0834, rebounding from a near three-year low of $1.0636 in the previous session. The British pound also gained 0.9%, rising to $1.1650. Before that, the currency fell to its 35-year low of $1.1413 last week. However, both currencies rallied in early London trading.

Meanwhile, Japan announced its biggest services sector decline. The country’s factory activity collapsed at its fastest in a decade. Australia is enduring a similar downfall.

As more countries enact draconian measures to lock down their economies, the global economy would be massively constrained in the near future – noted Ulrich Leuchtmann, the head of FX and commodity research at Commerzbank. He also added that the markets could quickly turn back into risk-off mode.