US dollar rallies as stock market rebound falters

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6 April 2020


The Federal Reserve’s efforts to fill the world’s need for dollars by flooding markets with liquidity has so far been only partially successful.

hile measures of stress in the interbank lending markets have come down to less worrisome levels, the US dollar rallied hard last week as the greenback remains for now the preeminent safe haven. The currency rose against every other major currency in the world, with the sole exception of the Russian ruble. The latter was buoyed by the sharp rebound in oil prices from multi-decade lows, prompted by news that oil producers were moving closer to cuts in production levels.

Economic data worldwide varied from bad to dreadful, depending on the exact time that it was collected in the past month. The most timely numbers, US jobless claims and Eurozone PMIs of business activity, all posted the worst levels on record by some distance, although this was largely expected.

Most economic data out this week will be fairly out-of-date. The exception will be the weekly jobless claims out of the US, where another record is expected, and combined with the previous two will enable us to paint a complete picture of the damage wreaked on the US jobs market. The Eurogroup meeting on Tuesday will be another point of focus for traders, as public responses to the crisis have become the main driver of market moves.


Last week’s PMIs of business activity in the UK were terrible, though not quite as dismal as elsewhere in Europe. The March composite PMI was revised down to a fresh all-time low 36.0, which is roughly in line with quarter-on-quarter GDP contraction of between 1.5-2.0%. This relative outperformance is, however, cold comfort, as it likely reflects the fact that the UK lagged much of the rest of Europe in imposing shutdown measures. We expect the April numbers, the preliminary estimate of which is set for release on 23rd March, to be significantly worse.

Economic news out this week will be of limited use. More important will be news regarding the roll out of the SME and income support programmes by both the UK government and the Bank of England.


The PMI numbers out of the Eurozone were as dismal as could be expected, given the early adoption of lockdown measures in most countries. The Italian number, at 17, was probably the lowest number ever recorded in this series in any country.

Amid the awful numbers, we see reason for cautious optimism. The size of the state response from the individual countries and the Eurozone as a whole is enormous, matching the size of the 08/09 crisis. Contagion numbers in both Spain and Italy also seem to suggest that the worst of the crisis has now passed. Both the number of confirmed cases and deaths caused by the virus have shown encouraging signs of slowing in these countries.


The carnage in the US jobs market was highlighted by the new record setting weekly jobless claims, 6.6 million to be exact (Figure 1). The payrolls report for March, while not as bad, is less meaningful as the survey was taking in mid-march, before most US states decreed various degrees of lockdown.

Figure 1: US Initial Jobless Claims (2007 – 2020)

The massive job destruction points to a weakness of the US economy during a temporary shutdown: the absence of job protections and mechanisms to regulate and slow the dismissal of workers means the hit to US employment will likely be larger. At some point in the next few weeks, we expect that markets will realise this and it will result in a rebound of the euro vs. the US dollar.