The extremely tense situation prevailing on world markets suits the roller-coaster ride of either the European currency or the greenback. Of course, the dollar is in a better position than its European counterpart, but experts predict it will weaken due to a possible reduction in the Fed rate.
Earlier, leading economists, along with Jerome Powell, chairman of the Fed, unanimously argued that the fundamental foundations of the American economy remain strong, despite adverse circumstances. This was confirmed by statistics in January of this year, where US household incomes grew by 0.6%, although growth was projected to be within 0.4%. However, the Chinese coronavirus made its own adjustments, which is why previously a strong greenback began to sag.
Experts have recorded a massive decline in demand for American currency in the global financial market. One of the factors of the fall was the PMI Caixin index for the US manufacturing sector. On Monday, March 2, it fell to a minimum value of 40.3 points, although even in the crisis year of 2008 it was slightly higher. Earlier, in January 2020, the December ISM US manufacturing index set the stage for the greenback, which suddenly fell back to 10-year lows to 47.2 points. In the future, this figure could rise to 50.9 points, although in March experts predict a slight drop in this index. Such a swing negatively affects the dynamics of the greenback, which is under significant pressure.
Analysts draw attention to three important factors contributing to the weakening of the US currency:
1) a high probability of a decrease in the Fed key rate at a meeting in the current month scheduled for March 18;
2) panic in the United States over the ubiquity of the coronavirus COVID-19;
3) a sharp decrease in the yield (below 1.3%) of 10-year US Treasury bonds.
According to experts, the rapid collapse of the US stock market gave odds to the European currency, temporarily weakening the dollar. Unexpected help to the euro was provided by Luis de Guindos, vice president of the ECB. According to him, the best option in this situation will not be monetary incentives, but a change in financial policy.
Another driver of the euro's rise was the positive macroeconomic statistics for February, which included manufacturing PMI indices in Europe. The fact that a number of indicators were revised upward gave a pleasant surprise for the investors [German - from 47.8 to 48 points, French - 49.7 to 49.9 points, and the pan-European index - from 49.1 to 49.2 item]. This was just a spoonful of honey in a tar barrel of European statistics, but it turned out to be quite enough for the euro to grow and strengthen.
In a similar situation, the American currency, on the contrary, began to recede, losing its position. One of the key issues undermining the greenback was the potential Fed rate cut this month. The market interpreted the statement by Powell regarding the rate as a settled issue, and now it is only a matter of nuances. Experts admit several scenarios. Firstly, it is possible that the rate will be reduced by 25 basis points (bp) in March and April, as well as in the fall. As a result, the total decline will be 75 bp. Secondly, during the following meeting, the regulator is able to drop the rate immediately by 50 bp, and in the fall it will study the situation whether to reduce or leave it as it is. The third, most favorable option involves a one-time decline either in March or in April.
The current situation, along with other fundamental factors, exerts a powerful pressure on the greenback. The American currency is resisting this by all means, but now fortune is on the euro side. Nevertheless, economists have noted three factors supporting the USD, which will help it stay afloat:
1) The traditional status of the currency of refuge. According to experts, this status of the dollar is best manifested in the currency assets of world managers. According to the IMF, the greenback account is 62% of the total assets, the euro is 20% and only 6% for the yen;
2) High liquidity. Currently, USD is a mandatory currency not only for investors but also for all global companies and dignitaries. Greenback is used in all areas of the global economy - from international trade to commodity pricing and foreign exchange transactions. The greenback share in world currency turnover is more than five times the share of the yen and almost three times the volume of the euro. The use of the American currency opens the way for investors to the most liquid bond market in the world, therefore, USD holders have no problems with the allocation of funds;
3) Increased differential yield. Another key factor in favor of the US dollar is the availability of high-yield US treasury bills. Economists consider them the best risk-free assets, whose income exceeds the European and Japanese counterparts combined. Note that even the recent sharp drop in 10-year Treasury bonds could not deprive them of this advantage.
Experts said that the current situation gave a respite to the euro, but did not break the dollar. They also added that the EUR / USD pair still retains the potential for further growth. This is largely due to the upward trend launched by the euro at the end of last week. On Monday, March 2, the EUR / USD pair went up rapidly after a series of declines. Although by the end of the day it went down to the level of 1.1114–1.1115.
Analysts draw attention to the fact that the tandem has overcome the key barrier of 1.1100, and now can move higher. On Tuesday, March 3, the pair rose to 1.1143, trying to reach new heights.
However, further efforts were unsuccessful, and the tandem slipped to the levels of 1,1130–1,1131, trying to get out of this range. At the moment, this bar has not yet been overcome.
Experts concluded that the most important new resistance level for the EUR / USD pair will be the mark of 1.1240. In the event of its breakthrough, nothing will prevent the classic tandem from moving on. It will be able to step over the current price levels if the probability of the next Fed rate cut remains high, and the ECB does not make unexpected statements about the prospects of monetary policy.
