The U.S. Dollar is Weakening. What Caused its Decline?
The U.S. dollar’s traded in the red on Thursday, getting on course for its biggest three-day plunge since the coronavirus-fueled market selloff in March. Investors braced for the outcome of a U.S. central bank policy meeting, hoping it might hint at more stimulus.
Meanwhile, traders unwound some safe-haven demand for the dollar as Democrat Joe Biden approached victory in the U.S. presidential race. Election officials are now tallying votes in several states that will determine the outcome.
Financial markets prepared for weeks of uncertainty as President Donald Trump has opened a multi-pronged attack on vote counts in several states. He is pursuing lawsuits, and such additional delay is widely seen as dollar negative.
Justin Onuekwusi, the portfolio manager at LGIM, stated that the Fed is a bit of a sideshow. However, there is a chance it may strengthen forward guidance around quantitative easing. Still, that would be greenback negative as we may also have less stimulus.
The dollar tumbled down by 0.7% to 92.71 against a basket of its rivals. It reached its lowest level in more than a week. Furthermore, the greenback has lowered by 1.4% on a cumulative basis, its biggest three-day drop since March due to Refinitiv data.
The Fed’s response
There was also a broad-based decline in U.S. Treasury yields. Spreads between benchmark 10- and 2-year maturity debt tightened to its narrowest levels in more than three weeks. That further compounded the dollar’s weakness.
Investors expect the Fed to stick closely to its last statement, repeating its pledge to do whatever it can to help the economy through the pandemic recession as the final result of U.S. elections is still uncertain. The agency’s decision is due at 1900 GMT.
John Velis, the FX and macro strategist at BNY Mellon, noted that the greenback would likely be caught between a lack of interest in shorting the currency on the prospects of a potential Biden win and a haven bid on the uncertainty of the disputed election.
The Chinese Yuan continues to rally
Meanwhile, the currencies which had borne the brunt of Trump’s protectionist policies in recent years gained the most in the previous days. The Chinese yuan briefly jumped to a more than two-year high against the greenback.
The euro skyrocketed above the $1.18 mark. It gained 0.9% from the previous session as some traders bet on a Biden victory. John Vail, the chief global strategist at Nikko Asset Management, stated that the euro fluctuated the last couple of days. Still, in the end, it seems like the common currency tends to be stronger under a Biden scenario. Also, the British pound almost reached $1.31 after the central bank spoke about its bond purchase plan.
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