Dollar falls as lockdowns ease and traders turn less averse to risk

LONDON (Reuters): The dollar fell across the board yesterday as traders grew less averse to risk amid an easing in coronavirus lockdowns in several countries.

The dollar was weaker against the Japanese yen and the euro as investors turned more positive on Italy and saw the Bank of Japan continuing to support an economy battered by the virus.

“The dollar has started the week on the back foot... It reflects more risk-on trading conditions at the start of this week,” said Lee Hardman, currency analyst at MUFG.

“Most notably, there was a sharp drop yesterday in the reported number of COVID-19 fatalities in a number of countries... which provides further encouragement that lockdown measures are proving effective,” Hardman said.

Credit-rating agency S&P reaffirmed on Friday Italy’s BBB rating, although many had expected a downgrade, supporting the common currency by limiting the escalation of an economic and political crisis on the continent.

The BoJ expanded its stimulus to help companies hit by the coronavirus crisis, pledging to buy unlimited amount of bonds to keep borrowing costs low as the Government tries to spend its way out of the deepening economic pain. The dollar shed 0.4% of its value versus the Japanese yen to trade at 107.11 yen, having fallen earlier to a two-week low of 107.05.

The euro was up 0.3% at $ 1.0848.

Traders now shift their focus to a US Federal Reserve meeting ending Wednesday and a European Central Bank (ECB) meeting on Thursday as major central banks once again take the stage as the global economy battles against a deep depression. On Sunday, the Australian states of Queensland and Western Australia said they would ease social distancing rules this week as the number of people infected decreased, pushing the Australian dollar to a seven-week high of 0.6469 against the dollar.

Encouraged by a fall in infection rates, Germany allowed small retail stores to reopen. Now large corporations are following suit. Italy will also ease lockdown measures from 4 May. These measures, alongside with more positive COVID-19 data, has turned investors towards more risky assets and abandon the safety of the dollar, analysts said. A Reuters index that tracks the dollar against other major currencies fell below 100 for the first time since last Wednesday.

Some analysts believe the move came too early, since lockdown measures are still in place and it will take time to return to pre-COVID-19 behaviour.

Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Merrill Lynch, remains bullish on the dollar and thinks a recovery is some way away.

“There’s a clear trade-off – either you open up and you see more infections and more deaths or you remain closed and you kill your economy. It’s no clear answer here, there’s no right or wrong. One thing is certain, we cannot eliminate the virus unless we find a vaccine or a cure, and no matter what we do we cannot have a strong recovery as long as this virus remains,” Vamvakidis said.

“This is why we are a bit concerned of the market rally we have seen in risk assets... We’re still risk-off, we still like the dollar. We believe we still have not seen the worst off in market correction,” he said.