FX Talking: I need a dollar

The unique nature of this crisis and collapse in risk assets has exposed fragilities in the system – think leverage, think liquidity. And surprisingly USD funding stresses have re-emerged despite the lessons supposedly learned in 2008.

Policymakers are now in fire-fighting mode. We think the Fed and the US Treasury have the tools to address the strains in the USD funding markets and conditions will probably start to improve over coming weeks. However, there is no getting away from the fact that prolonged lock-downs mean deep recessions.

In the FX market, the dollar has so far been the only winner in this crisis. We think we’re not too far away from Washington having a more formal problem with dollar strength as yet another round in the currency war unfolds. There is much uncertainty, but we see the dollar handing back recent gains into the summer.

With policy rates now near zero in many countries and unconventional monetary policies widely deployed, the FX recovery against the dollar is likely to be tentative at first. Commodity currencies look certain to lag, but those countries employing pro-active fiscal policy (Asia and Europe) may be the first to bounce.