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US dollar turns safe haven for investors

sandhya@khaleejtimes.com Filed on February 20, 2020

The yen fell past 112 to a 10-month low against a broadly stronger US dollar on Thursday, extending recent losses for the Japanese currency as investors fretted about dire economic news out of the country.

Against the yen, the dollar rose 0.71 per cent to 112.14, its highest since April. The yen, which benefits during geopolitical or financial stress as Japan is the worlds biggest creditor nation, has slipped about 2 per cent over the last two sessions, its biggest two-day drop since September 2017.

"The overall impact of China Coronavirus crisis has put the entire Asian economy under pressure. Previously in times of crisis Japanese Yen would act as a safe haven asset. However, right now investors prefer US dollar and US assets as safe haven assets," said Quyen Nong, CEO at AtoZ Markets

Against a basket of currencies, the dollar was 0.18 per cent higher at 99.744, just shy of the 100 mark, a level not touched in nearly three years.

Financial markets were little moved by US unemployment data. There was encouraging news on the struggling manufacturing sector, with other data showing factory activity in the mid-Atlantic region accelerated to a three-year high in February, likely as tensions diminished in the 19-month trade war between the United States and China.

"I expect moderate depreciation in the Yuan in 2020, mainly due to a firmer dollar perspective. Additionally, central banks in Asia are expected to cut rates in the first half of this year to counter the negative impact caused by the COVID-19. Such actions will indirectly push the dollar higher as well. USD/CNY may touch 7.10 sometime in the second quarter of 2020," said Jimmy Zhu, Chief Strategist of Fullerton Markets

The US economy is showing no signs of losing steam, US Federal Reserve Vice Chair Richard Clarida said in an upbeat assessment of the outlook that showed little alarm about the coronavirus outbreak.

The Australian dollar slid to a near 11-year trough as data showing a surprisingly sharp rise in unemployment added to the case for further cuts in interest rates at a time when markets were already skittish over the coronavirus.

The Aussie was 0.76 per cent lower against the greenback.

Sterling plunged to a three-month low against the dollar as the greenback's broad-based strength swept away recent pound gains which were driven by the appointment of a new, potentially high-spending British finance minister. "The JPY has slipped sharply this week and lost more ground overnight as its safe-haven appeal vanishes amid local virus worries," Shaun Osborne, chief FX strategist at Scotiabank in Toronto said in a note.

China reported a drop in new coronavirus infections on Thursday, but scientists warned the pathogen may spread more easily than previously believed as two elderly passengers from a ship quarantined in Tokyo became the latest to die. A run of dismal economic news out of Japan has stirred talk the country is already in recession. "The ties to China, exposure to the coronavirus, compounded by Japan's own domestic challenges is bolstering fears that the world's third-largest economy is likely contracting for the second consecutive quarter," said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Similarly, Fawad Razaqzada, Market Analyst, TradingCandles.com, said: "Clearly, the impact of coronavirus is damaging to the Chinese economy. The prolonged lockdown should lead to a fall in aggregate demand and currency market participants are pricing this in with yuan weakening. I think it could easily fall to 7.2 per US dollar."

Unlike recent surges, the dollar's ongoing advance may be handing Europe an export advantage, by driving the euro to three-year lows against trade partners' currencies. A weakened euro has frequently irked US President Donald Trump, who grumbles that a "devalued" euro gives the region's exporters an unfair advantage. But those claims did not usually stack up, because previous dollar rallies did not see the euro tumble on a trade-weighted basis.

Now, though, the dollar is flexing its muscles, just as the global newsflow, economic data and option market positioning are working against the euro.

An index compiled by the European Central Bank and closely tracked by policymakers shows that this month's fall on a trade-weighted basis has taken the euro back to its levels of April 2017. It is down 2 percentage points this year, the biggest move since 2015.

The move is all the more striking because of shifting trade patterns, which have swelled emerging-market currencies' share in the trade-weighted basket at the expense of the dollar. China's yuan accounts for around 23 per cent, almost tripling since 2003, while the dollar's weight has shrunk to 17 per cent from 22 per cent. The euro has lost 2.7 per cent of its value against the Chinese offshore yuan since the start of the year, and 2.2 per cent versus the Swiss franc.European politicians will - privately at least - welcome the euro's trade-weighted drop - the stuttering German economy clearly needs a boost for its exporters. But the weakness may raise hackles in Washington and Bern - currency markets will be on red alert for any comments from Trump.

MR Raghu, managing director of Marmore Mena Intelligence, said: "Chinese yuan that was around RMB 6.88 against the U.S dollar in mid-January has depreciated and is now over RMB 7 against the USD. As the investor sentiment remains weak and businesses continue to suffer from transport restrictions, factory shutdowns and mandatory quarantine measures, the outlook remains bearish for Chinese Yuan."

- sandhya@khaleejtimes.com - With inputs from Reuters


Sandhya D'Mello

Journalist. Period. My interests are Economics, Finance and Information Technology. Prior to joining Khaleej Times, I have worked with some leading publications in India, including the Economic Times.

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