Icy US-China relations and raging pandemic mean sliding dollar may have further to fall

Name: In first Covid-19 presser in months, Trump shifts tone and reverses stance on masks
Uploaded: 2020-07-28T15:00:19.000Z
Duration: 2 min
Description: In first Covid-19 presser in months, Trump shifts tone and reverses stance on masks

While investors flocked to the safety of the greenback early in the pandemic, market perceptions have since changed

The George Floyd protests, the closures of consulates and the US’ coronavirus response have all made markets reassess their positions

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The China Consulate General in Houston is seen without the Chinese national flag on July 24, after the US government ordered its closure. Photo: EPA

Neal Kimberley

Published: 11:00pm, 28 Jul 2020Updated: 1:19am, 29 Jul 2020

“The stature of the dollar matters,” wrote Henry M. Paulson, US Treasury secretary from 2006 to 2009, in an article in May. But right now, the US dollar’s stature is somewhat diminished, even in a climate of risk aversion that might ordinarily be expected to support safe-haven flows into the currency.

Indeed, the greenback may continue to have a tough time of it. Paulson, writing in Foreign Affairs magazine on May 19, made the valid point that, back in late March, “global financial markets were collapsing amid the chaos of the novel coronavirus pandemic” and that “international investors immediately sought refuge in the US dollar, just as they had done during the 2008 financial crisis”.

Yet last Friday, with the coronavirus pandemic still raging globally, the value of the US dollar versus a basket of currencies fell at one point to 94.358, a 22-month low.

While rational investors flocked to the safety of the greenback in the initial stages of the pandemic, market perceptions have since changed.

Three factors – rising social tensions in US cities following the death of George Floyd in Minneapolis on May 25, sharply worsening relations between Washington and Beijing, and concerns about the way the coronavirus health emergency is specifically playing out in the United States – have all combined to make markets less comfortable with holding greenbacks.

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

Markets needed US dollars in late March because the greenback remains the dominant reserve currency used for global payments, but those needs were driven by fears that access to US dollar liquidity would become problematic.