Tuesday brings a recovery on the stock markets. But the US threatens to become the new trouble spot.


Staff member
After market participants have processed the stimulus package from the Federal Reserve, there was no calm on Tuesday, but many asset classes were able to recover strongly at times. The Dow Jones Industrial Average, for example, rose an impressive 11.3%, while the Euro Stoxx 50 also posted a gain of almost 10%. Gold also managed to move further away from its recent lows. Today, the precious metal recorded a 4.4% gain against the US dollar. After the strength of the dollar had recently caused headaches in the international economy, the American currency, measured by the dollar index, lost around 0.4% today, but is still trading relatively high above 102 points. EUR/USD is at $1.0770, which is almost unchanged from the previous day.

Even if the Fed's measures may not have led to a more sustained dollar weakness, the dollar swap lines that have been set up have at least been able to remove the extreme volatility from the cross-currency basis. The basis is currently at a tolerable -0.8 basis points. As a reminder, last week, when the dollar shortage was at its worst, the base was at a low of -130 basis points! This is not to say that trading in the swap and forward markets is as smooth as it was before Corona, as swap point spreads are still relatively wide, but the situation is nowhere near as tense as it was a few days ago.

It is questionable, however, how long this will remain so. According to reports, the American President, Donald Trump, is already considering lifting the strict social distancing rules and sending people back to work as quickly as possible in order to get the economy back on track as quickly as possible. Suicides as a result of an economic crisis, he is quoted to have said, would exceed the number of deaths caused by Corona. This is certainly not talk worthy of a president, but so be it. The danger is that the United States will become the world's biggest trouble spot if the precautions are scaled back too quickly. The prospects are already poor, given the medical capacity available in states such as New York. How bad will things get if the virus gets out of control in America? For the markets, this uncertain outlook means that neither equities nor gold can be sure of their current gains. If the uncertainty rises sharply again, the demand for liquidity will also rise again. This would mean a renewed strengthening of the US dollar.

In any case, I think it would be premature to bet on sustained losses in the dollar at this stage. Following the often quoted "dollar smile", I too believe that the dollar will not only profit in times of a good economic outlook for the USA, but also from great uncertainty. And this is precisely what we are still dealing with now.