The dollar surged against global currencies as traders warned of a squeeze on the greenback due to the pressure piled on banks’ and companies’ financing by the coronavirus outbreak.
In Asian trading on Thursday the dollar index, which measures the world’s reserve currency against a basket of peers, jumped 0.6 per cent as global investors rushed to obtain dollar funding to help them ride out the pandemic.
That hit currencies across the region with Japan’s yen falling 1.1 per cent to ¥109.13 per dollar and the Australian dollar to $0.557, its lowest since 2003. The pound dropped as much as 1.1 per cent to $1.1478, its weakest since 1985.
Mansoor Mohi-uddin, a currency analyst at NatWest Markets, said the economic stress from a “dollar squeeze” was moving across the world. The spread of the virus had exposed the risks created by a more than doubling in dollar-denominated corporate debt to $12tn since the 2008 global financial crisis, he added.
“That is a huge amount of dollar debt that companies need to fund. The banks are also struggling to find dollars in the wholesale market,” said Mr Mohi-uddin.
Zach Pandl, currency analyst at Goldman Sachs, said the dollar’s rise “reflects the unique role the currency plays in the global economy and financial system, rather than a view among investors that the US economy is better placed to weather the coronavirus shock”.
The pressure reverberated through the region’s stock markets on Thursday. Hong Kong’s Hang Seng fell 3.3 per cent, China’s CSI 300 2.1 per cent and Australia’s S&P/ASX 200 down 1.6 per cent. South Korea’s Kospi plummeted 8 per cent triggering a trade halt.
That was despite new pledges of financial support from governments and central banks. The European Central Bank said on Wednesday it would buy another €750bn in bonds while President Donald Trump signed a relief package to provide support for Americans affected by the pandemic
Futures trading tipped the S&P 500 to drop 3.5 per cent when Wall Street opens. European stocks were expected to fall 3.2 per cent and the FTSE 100 2.6 per cent. Overnight the S&P 500 dropped 5 per cent.
In Japan, the Topix index gained 1.5 per cent on reports that the government was preparing a stimulus package worth ¥30tn. On Thursday the central bank offered to buy ¥1tn worth of government bonds in an unscheduled operation.
“Investors are still anxious,” said Tai Hui, chief Asia markets strategist at JPMorgan Asset Management. It is unclear whether aggressive easing by central banks and moves to address tight dollar liquidity were feeding through to the global financial system, he added.