As markets panic over coronavirus pandemic, the US dollar is king – for the time being

Investors’ dash for cash prompted market sell-offs last week, as US dollar liquidity is critical to the functioning of the global financial system. But looking beyond the crisis, too much liquidity could give rise to asset price inflation

Reading Time:3 minutes

The detail on a US$20 note. Whatever the Fed and others are obliged to do now is likely to have consequences that extend far beyond the duration of the coronavirus pandemic. Photo: Reuters

Published: 1:00am, 18 Mar 2020Updated: 1:02am, 18 Mar 2020

“Cash is trash.” That was the view of Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund, when he spoke to CNBC at the World Economic Forum in Davos in January. But, right now, in a global economy profoundly disrupted by the coronavirus, cash is king.

Once you accept that, recent market movements become more intelligible. Markets that are not usually expected to move together were hit by sell-offs in the middle of last week. Investors were in a dash for cash as falling prices triggered wholesale position liquidation in panicked markets.

The cash that investors needed was primarily greenbacks as ready access to US dollar liquidity is critical to the smooth functioning of the global financial system.

The US Federal Reserve, perhaps mindful of how quickly financial markets can seize up – as was the case during the global financial crisis – acted swiftly last week and again on Sunday – cutting interest rates and flooding the system with dollars.

The Fed’s shock-and-awe approach, in coordination with other central banks, was intended to calm market nerves with US dollar liquidity, the oil in the engine of the global financial system. Whether the moves prove ultimately successful remains to be seen but the monetary authorities had to act.