Forex - Dollar Climbs on Powell's Sobering Outlook

By Peter Nurse

Investing.com - The U.S. dollar has seen demand in early European trade Thursday, as risk aversion reigned on the back of Federal Reserve Chairman Jerome Powell's sobering outlook for U.S. economic growth and his ruling out of negative interest rates.

At 2:55 AM ET (0655 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 100.37, up 0.1%. EUR/USD fell 0.1% to 1.0807, while GBP/USD dropped 0.3% to 1.2187.

Powell joined a list of policymakers to fend off the notion of negative U.S. rates in a webcast Wednesday. He also pledged to use the U.S. central bank's power as needed, but suggested that it might not be enough to avoid deep economic damage without more fiscal support.

The market is still priced for the Effective Fed Funds rate to dip into negative territory next year, “but his comments could stop the market from pricing an even lower Fed Funds rate,” said analysts at Danske Bank.

This additional fiscal support may prove tricky to get through Congress. Earlier this week House Democrats proposed another coronavirus relief bill, worth $3 trillion, which includes funding for state and local governments and more direct stimulus payments for Americans.  However, the Republicans have rejected the idea.

The latest weekly jobless claims, at 8:30 AM ET (12:30 GMT), could well illustrate the need for more support, with claims for first-time unemployment benefits expected to come in at 2.5 million. This would push the number of people claiming unemployment benefit over the 35 million level since the coronavirus virus first hit. 

This week Goldman Sachs (NYSE:GS) analysts revised their peak estimate for the U.S. jobless rate to 25%, up from 15%. The April official rate came in at 14.7% last week. The job losses have hit poorer sections of the population hardest: Powell said 40% of families with income below $40,000 a year had lost a job, according to Fed analysis.

The other main currency which has gained thanks to this period of risk aversion has been the Japanese yen, and JPMorgan Chase (NYSE:JPM) sees the potential for more strength ahead.

At 02:55 AM ET, USD/JPY traded 0.1% lower at 106.86.

“We now see the risk of multi-year yen appreciation,” analysts at JPMorgan said, in a research note. “We expect the yen depreciation era (a sustained period of substantial yen depreciation in real terms) started by Abenomics to end.”

The bank cited the return of deflation as a mounting concern in Japan, as well as record outflows of portfolio capital slowing as Japanese fund managers confront much lower bond yields abroad. Additionally, Japan’s trade balance may get a sustained boost from the drop in oil prices.

Elsewhere, sterling fell to a seven-week low amid growing fears that the Bank of England too will be forced to resort to negative rates. Fears of a hard Brexit at the end of the year when the current transition period ends out are also weighing in a country that now has the highest virus death toll in Europe.