Forex - Dollar Still in Demand, For Now

© Reuters.

By Peter Nurse

Investing.com - The dollar was in demand in early trading in Europe on Friday, as investors sought safety following the dire U.S. unemployment figures which illustrated the extent of the economic fallout from the coronavirus pandemic.

At 3:05 AM ET (0705 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, rose above 100 for the first time in over a week to stand at 100.460, up 0.2% on the day and up some 0.6% on the week. EUR/USD fell 0.3% to 1.0823, while GBP/USD rose 0.2% to 1.2367. USD/JPY climbed 0.1% to 108.02.

The outbreak of the pandemic has caused developed economies to virtually close down as governments attempt social distancing policies to stem the spreading of the virus.

Further evidence of the damage associated with these policies emerged in the United States Thursday, with an unprecedented number of workers - 6.6 million - filing jobless claims.

At the same time, the pandemic has shown few signs of abating Friday, with global cases surpassing one million, with more than 53,000 deaths, over 6,000 of which were in the U.S.

"The U.S. labor market has more or less collapsed," said Commonwealth Bank of Australia currency analyst Joe Capurso, in a Reuters report.

"The increase in the dollar because of the poor U.S. economic data reflects the dollar's status as a counter‑cyclical currency. It lifts when the global economy deteriorates, even if the deterioration in the global economy is the U.S."

There’s more U.S. employment data to come at 8:30 AM ET (12:30 GMT), in the form of the official jobs report for March. However, this was from the week of March 12, before any major U.S. state had gone into lockdown, and thus is likely to only have a limited impact.

Adding to the dollar’s appeal has been the sudden rebound in the price of oil, although Thursday’s sharp gains have been sold into early Friday. Oil is priced in dollars and the U.S. is also the world's top oil and gas producer.

“The USD has once again proven to be King in times of crisis,” said analyst Andreas Steno Larsen at Nordea, in a research note, “probably as most debt is still denominated in USDs, which means that USDs are sought after when liquidity tightens globally as has been the case due to the corona lockdowns.”

However, the dollar could be hammered as soon as we approach a reopening of the economy, he warned.

“USD liquidity is sprayed at every single scarce corner of the market now. This is ultimately going to kill the USD momentum; it is just a matter of time in our opinion,” Larsen said.

The dollar “could face a hit of >15% over the coming 12-24 months if the global economy gets out of the woods in the meanwhile.”