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Why the US dollar has been on a freefall this week

Why the US dollar has been on a freefall this week

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The US dollar has been on a downward trend in the past two days as the market has reacted on the new information on coronavirus pandemic.

The closely watched US dollar index has declined by more than 1.25 per cent since Monday, and some experts expect it to continue falling. This index measures the performance of the greenback against a basket of currencies like the euro, yen, Swedish krone, Canadian dollar, and the British pound.

Today, the US dollar declined by 0.50% against the Canadian dollar and by 0.25% against the euro. It dropped by 0.60% against the British pound and by 0.32% against the Swedish krone. So, why is the US dollar falling?

Likelihood of a coronavirus vaccine

One of the biggest news yesterday came from Moderna, a biopharma company. The company said that initial tests of its coronavirus vaccine were showing positive results.

Other companies like Sanofi and AstraZeneca too have said that they are working on a vaccine that could help prevent future spread of the disease. At the same time, Gilead is continuing to distribute its remdesivir drug in the United States.

This positive news is negative for the US dollar. That is because it means that countries can reopen fast. In turn, this will lead to more companies and investors to shift their investments to local currencies like the euro, South African rand, and British pound.

These participants rushed to the safety of the US dollar at the height of the coronavirus pandemic in March as you can see below.

US dollar

More dovish Federal Reserve

The Federal Reserve is also contributing to the weakness of the US dollar. In an interview with CBS on Sunday, Jerome Powell said that the US economy would remain weak for a substantial amount of time. He also said that the bank was prepared to do “whatever it takes” to support the US economy.

With interest rates at historic lows, this statement means that the bank will continue providing easy money to the market. It achieves this by quantitative easing (QE), a process in which it prints money and buys financial assets. In the past two months, the bank has printed more than $2 trillion, bringing its balance sheet to almost $7 trillion.

In contrast, the balance sheet was less than $500 billion before the past financial crisis. More QE is usually negative for the US dollar because it depresses interest rates.

Positive news from Europe

The US dollar also weakened because of a series of positive news from Europe. Earlier today, the Boris Johnson administration said that it will lower tariffs on most goods. The document was received positively by the market, causing the British pound to jump.

Meanwhile, in the European Union, Angela Merkel and Emmanuel Macron reached a financing agreement to support the worst-affected countries. This deal removes some of the existing tensions among EU member states.

What next for the US dollar?

The strength or weakness of the US dollar index depends on the movement of currencies in the basket. In the coming days, these currencies will likely move depending on how fast their countries reopen and the state of their economies. Tomorrow, we will receive inflation data from the UK followed by manufacturing PMI on Thursday and retail sales on Friday. From the eurozone, we will get the inflation numbers and PMIs while from Japan, we will get the CPI and April trade numbers.

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Crispus Nyaga
Crispus Nyaga
Crispus is a financial analyst with over 9 years in the industry. He covers the stock market, forex, equities, and commodities for some of the leading brands. He is also a passionate trader who operates his family account. Crispus lives in Nairobi with his wife and son.