Dollar records biggest weekly drop since 1985

(FMT) – Two weeks after investors dumped everything they could to hoard US dollars, some are now starting to sell.

Intercontinental Exchange Inc’s US Dollar Index sank 4.4% this week, the biggest weekly drop since 1985.

Traders point to a confluence of reasons, ranging from less stress in funding markets, the repatriation of funds as the quarter ends and the worsening coronavirus outbreak in the US.

“The sell-off in the US dollar is a reaction to the liquidity measures announced by the Federal Reserve and other central banks,” said Jane Foley, a currency strategist at Rabobank. “Fear may have subsided for now.”

A separate gauge of the greenback, the Bloomberg Dollar Spot Index, fell 4.1% on the week, the largest weekly loss since its inception in 2005. It had surged 8.3% over the previous two weeks.

The greenback slumped against most of 16 major peers this week, weakening more than 7% against the Norwegian krone and the British pound.

The decline comes after the Federal Reserve expanded currency swap lines with central banks, ramped up cash offered to the repurchase-agreement markets and introduced a series of tools to unfreeze credit markets.

Stress in cross-currency basis markets, a key funding channel, has eased.

The three-month dollar-yen basis is now back to levels seen in early March, while the euro equivalent has swung into positive territory. In foreign-exchange swap markets, the costs to borrow dollars is back to about 1.86% after it printed at more than 2.5% last week.

“It’s 100% a dollar-funding story – the mean reversion of the dollar liquidity crunch is prompting all other FX to rally against the dollar,” said Margaret Yang, a strategist at CMC Markets Singapore Pte.