The U.S. dollar saw competition in early European trade on Thursday. When risk aversion reigned on the heels of Federal Reserve Chairman Jerome Powell. Whose grim forecast for U.S. economic growth and his exclusion of negative interest rates.
At 2:55 AM ET (0655 GMT), USA. The dollar index, which measures the greenback against the basket of six other currencies, was 100.37, up 0.1 percent. EUR/USD fell by 0.1 percent to 1.0807, while GBP/USD fell by 0.3 percent to 1.2187.
Powell joined the list of policymakers to defend the notion of negative U.S. rates on Wednesday’s webcast. He also promised to use the power of the US central bank as needed. But suggested that it might not be enough to avoid serious economic damage without more fiscal support.
The market is still priced for the Effective Fed Funds rate to fall into negative territory next year. But his remarks could save the market from pricing an even lower Fed Funds rate.
This additional fiscal support may prove difficult to get through Congress. Earlier this week, House Democrats introduced another $3 trillion coronavirus relief package. Which includes support for state and local governments and more direct welfare benefits for Americans. The Republicans, however, have dismissed the proposal.
The new weekly unemployment claims at 8:30 AM ET (12:30 GMT) could well-reflect the need for additional assistance, with first-time unemployment benefits estimated to hit 2.5 million. That will raise the number of people seeking unemployment insurance by more than 35 million since the coronavirus virus first struck.
This week, Goldman Sachs (NYSE: GS) economists updated their average forecast for the U.S. unemployment rate to 25 percent, up from 15 percent. The April official rate was 14.7% last week. Employment cuts have affected poorer parts of the population hardest; Powell said that 40 percent of households with earnings below $40,000 a year have lost their jobs, according to the Fed’s report.
The other big currency acquired from this time of risk avoidance was the Japanese yen, and JPMorgan Chase (NYSE: JPM) sees the opportunity for more power ahead.
At 02:55 AM ET, USD/JPY traded 0.1 percent lower at 106.86.
We now see the possibility of multi-year yen appreciation. We expect the age of yen deflation era (a prolonged period of rapid yen deflation in real terms) that Abenomics has started to stop.
The bank cited deflation returns as a rising problem in Japan, as well as a historic decline in equity capital outflows as Japanese fund managers face significantly lower international bond yields. In fact, Japan’s trade balance can be gradually improved by a decline in oil prices.
Elsewhere, the British Pound plunged to a seven-week low, despite increasing concerns that the Bank of England, too, would be forced to return to negative rates. Fears of hard Brexit at the end of the year, when the current transition period comes to an end, are also being felt in a country that now has the highest number of virus deaths in Europe.