(Bloomberg) --
The world’s reserve currency surged, with a dollar gauge rising to a record high, amid a rush for cash in anticipation of a prolonged coronavirus pandemic.
All Group-of-10 currencies tumbled, with the oil-linked Norwegian krone suffering the most heavy losses. Even traditional safe assets, such as the yen, dropped as much as 1.4% as liquidity evaporated with investors rushing to meet margin calls.
“Everything is getting sold,” said Chris Rands, portfolio manager at Nikko Asset Management Ltd. “We’re doing the absolute bare minimum because offering to sell anything in these markets is just crazy -- we’re trying our best to hang on and see where it all shakes out. I don’t see this dollar stampede going away.”
The rush for dollars is gaining pace despite every attempt by the Federal Reserve and its peers to provide liquidity through swaps, repurchase operations and emergency rate cuts. As the virus spreads and the death toll mounts, countries from Italy to Malaysia have locked down borders, strangling commerce and trade, and leading to a cash flow crunch for companies.
Sovereign bonds from France and Italy to Greece rocketed after the European Central Bank announced a huge boost in its efforts to stabilize the economy and capital markets. Yet that offered little relief for the beleaguered euro, which fell as much as 1% on Thursday and the region’s international equities benchmark, the Stoxx 600, failed to hold gains.
Meanwhile, the Bloomberg Dollar Spot Index gained as much as 1.1% to touch an all-time high, according to data going back to 2004.
“Simply put, it’s a liquidity mismatch as there are far more U.S. dollars in demand than currently on offer,” said Stephen Innes, chief market strategist at Axicorp Ltd., adding that government and central bank policy appears “mostly defenseless against the super steamroller of extreme weakness across equity, bond, and credit markets.”
Intervention Talk
The sell-down is raising talk of coordinated intervention in the foreign exchange markets. The Group of Seven’s last joint currency intervention was in the wake of the 2011 Japan earthquake, when a statement was issued.
“We may start to hear talk of intervention in foreign-exchange markets – at least an attempt to calm disorderly markets,” ING’s Chris Turner wrote in a note to clients. “The biggest fans of currency intervention will be the White House.”
So far, policy makers have acted independently, with the bulk of their measures aimed at providing dollar liquidity and calming bond markets. The Federal Reserve, which has slashed rates twice and pledged to buy more bonds, is debating whether to expand the scope of its interventions, according to Philadelphia Federal Reserve Bank President Patrick Harker.
The Bank of Japan on Thursday offered to buy 1 trillion yen ($9.2 billion) of bonds in an unscheduled operation, and followed up with offers to buy more. Hours later, the Reserve Bank of Australia said it would buy bonds across the yield curve to “address market dislocations.” It also announced that it would target a level of around 0.25% for the three-year bond yield.
Meanwhile, the Swiss National Bank is stepping up currency interventions to stem the haven franc’s advance, which has strengthened by almost 3% against the euro this year.
“We are seeing an unprecedented situation where the more central banks ease, the more dollars are being stacked,” said Min Gyeong-won, an economist at Shinhan Bank in Seoul. “The Fed’s bid for victory has failed, with markets not listening, worsening the dollar chaos and extending losses in Asian currencies.”
Emerging-markets are bearing much of the brunt from the dollar’s supremacy as they try to cope with collapsing exchange rates and plunging demand. With businesses and governments bracing for soaring costs on their dollar-denominated debt, EM central banks must grapple with slashing interest rates which could support growth but also destabilize their currencies further.
Turkey, South Korea, Chile, Vietnam, Sri Lanka and Pakistan have all eased this week, with more expected to follow in the coming days and weeks. Since Jan. 20 -- in the early stages of the virus concern in Asia -- the Russian ruble and the Mexican peso have tumbled more than 20%.
“The biggest thorn in central bankers’ sides is the lack of liquidity and the shortage of dollars across markets,” said Kit Juckes, chief currency strategist at Societe Generale SA. “It makes G-10 currencies trade like EM ones and supports the dollar irrespective of any other fundamentals.”
©2020 Bloomberg L.P.
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