Covid Back in Focus for FX After Election Takes an Ax to Dollar

The stars seem to have aligned for now for a weakening of the U.S. dollar, which notched its worst week since March. But as investors look to move beyond the U.S. election, their attention may once again move back toward the coronavirus pandemic as the big driver of the currency.

While media and market attention has been focused on the contest between President Donald Trump and his challenger Joe Biden, Covid-19 infections have continued to surge. The number of confirmed cases globally is nearing 50 million and the figure for the U.S. is closing in on 10 million. For the moment, data on jobs and manufacturing show that the American economy is recovering reasonably well from its lockdown-induced recession, but risks are growing as the northern hemisphere heads into winter and the prospects for a vaccine remain far from certain.

“We are cautious in extrapolating further USD weakness from here,” TD Securities strategists including Jim O’Sullivan wrote in a note Friday, saying that focus is likely to return to Covid-19 and the challenging prospects for fiscal support by the U.S. government.

Right now though, the greenback remains under pressure. The results of Tuesday’s U.S. elections are still being finalized, but Democratic presidential challenger Biden appears to be on his way to the White House, a situation that many see as broadly dollar negative. At the same time, the likelihood that Congress will be divided is helping to buoy riskier assets such as stocks, as are data showing a stronger-than-expected rebound in the U.S. economy, blunting the appeal of havens like the dollar. And on top of that, Federal Reserve Chair Jerome Powell kept the door open to a possible shift in the central bank’s bond-buying program in the coming months.

The greenback fell by at least 1% against all of its Group-of-10 counterparts over the past week and the Bloomberg dollar index, which measures it against a basket of developed- and emerging-market peers, plunged by almost 2% and touched a level unseen since May 2018. Other haven currencies such as the Japanese yen and Swiss franc appreciated versus the dollar, but they were clearly among the laggards, while commodity-related counterparts such as the Norwegian and Australian currencies led gains.

Dollar-yen, which this week busted below the key 104 level for the first time since March, is the key currency pair to watch as it appears to have “stretched too far to the downside,” according to TD. For ING Groep NV strategists including Francesco Pesole, the drop below 104 is “slightly disconcerting” in light of the global rally in riskier assets. In their view, it looks like the yen is simply caught up in a broad dollar decline and while it may continue to press the 103 level, it’s unlikely to lead FX gains versus the dollar.

The Swiss franc also broke through some notable levels, reaching its strongest level since 2015. But, like the yen, it has not been leading the way in terms of currency moves and for the moment the narrative seems squarely centered on the not-quite-so-mighty greenback.

“It seems investors don’t want to miss out on the expected rally in rest of world assets that a post-Trump era would signal,” wrote the ING strategists, although they also note that “the biggest threat” to the weaker dollar narrative probably stems from the pandemic.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.