How coronavirus stimulus and China tensions are battering the US dollar’s global dominance

Name: In first Covid-19 presser in months, Trump shifts tone and reverses stance on masks
Uploaded: 2020-07-30T12:45:21.000Z
Duration: 2 min
Description: In first Covid-19 presser in months, Trump shifts tone and reverses stance on masks

The pandemic has unleashed forces that are undermining sentiment towards the United States, dealing a severe blow to American ‘exceptionalism’ in markets

Earlier predictions of the dollar’s demise as the world’s reserve currency were off the mark, though, and the S&P 500’s strength indicates lingering resilience

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A woman counts US dollar bills in Buenos Aires, Argentina, on August 28, 2018. Massive stimulus to fend off the effects of the pandemic, political uncertainty and other factors have eroded confidence in the US currency in recent weeks. Photo: Reuters

Nicholas Spiro

Published: 8:45pm, 30 Jul 2020Updated: 9:08pm, 13 Oct 2020

Is the US dollar a safe haven or a risk asset? While this may seem absurd to ask given its status as the world’s dominant reserve currency, the dollar’s traditional role as a refuge in times of turmoil has been severely undermined.

Since March 20 – around the time the Covid-19 pandemic sent global markets into a tailspin – the dollar index, a measure of the currency against a weighted basket of its peers, has plunged 9 per cent to its lowest level since September 2018.

The simplest explanation for the decline is the collapse in US Treasury yields following the aggressive action taken by the Federal Reserve to fight the economic devastation wrought by the virus. The 10-year real yield, which strips out the impact of inflation, has fallen to minus 0.9 per cent after beginning the year in positive territory. The relatively high interest rates that had previously helped underpin the dollar are no longer providing support.

Even so, the Fed’s massive stimulus programme is not the only factor responsible for the dollar’s slide. The pandemic has unleashed a torrent of forces that are undermining sentiment towards the US, dealing a severe blow to American “exceptionalism” in markets.

US President Donald Trump’s disastrous response to Covid-19 has allowed the virus to spread rampantly across the country, with the US accounting for more than a quarter of the confirmed cases globally. This has caused the recent rise in economic activity to stall, inflicting further damage on the world’s largest economy.

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In first Covid-19 presser in months, Trump shifts tone and reverses stance on masks

Between July 21 and 28, the US averaged almost 1,000 deaths a day, up from a seven-day average of 490 in early July and the highest weekly death toll since late May, data from the Financial Times shows. The rollback of reopenings in several key states has dented consumer and business confidence.