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Markets react to Weakened US Dollar due to Risk Aversion, Pandemic Fears

Mohit Oberoi
Author: Mohit Oberoi

Last Updated: July 8, 2020

US dollar weakened today amid concerns over economic recovery, the slump in energy markets, and rising infections due to the pandemic.

Major Asian markets barring those in China closed with losses today while European markets were trading in red in early trade today. US stock markets also closed with significant losses yesterday and futures are pointing to a flat opening today.

Crude oil prices were also subdued amid oversupply fears. Crude oil prices, like other commodities, have a negative correlation to the US dollar.

Concerns over the US economy increased after Atlanta Federal Reserve Bank President Raphael Bostic sounded a cautionary note yesterday by terming the economic activity as “levelling off.”

“There are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise,” said Bostic.

While the US dollar is seen as a safe haven asset by some analysts, rising infections in the country could play a dampener.

“There are strong fears that the continued spread of the virus might quickly stifle this recovery again, which in turn would strengthen the U.S. dollar due to its – admittedly questionable – status as a safe haven,” Commerzbank foreign exchange analysts said in a client note.

Meanwhile, over the long term, the US dollar could weaken as the country’s position as the world’s biggest economy, and the most powerful country is challenged by a resurgent China. Today, the US formally began the process to withdraw from the WHO after Trump’s announcement in May.

Last month, Stephen Roach warned of a crash in the US dollar. “The U.S. economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit,” said Roach to CNBC Trading Nation while warning “The dollar is going to fall very, very sharply.”

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Mohit Oberoi

Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.