Mar 19, 2020 - Economy

Dollar rises to record highs as businesses prepare for coronavirus disaster

Data: FactSet; Chart: Andrew Witherspoon/Axios
Data: FactSet; Chart: Andrew Witherspoon/Axios

Panic in financial markets has grown to the point that many now believe the only safe asset is the U.S. dollar.

Driving the news: The value of the dollar index rose to near its highest level in 18 years, as banks, traders and businesses made a rush for cash, fearful they could run out as the economy sinks into recession.

  • "We're seeing a global liquidity squeeze, with every major government, business and financial institution poised to borrow unprecedented amounts in the world's deepest funding markets — American markets," Karl Schamotta, chief market strategist at Cambridge Global Payments, tells Axios.

What it means: The worried wave of dollar demand has pushed the greenback to new record highs against high-risk currencies like the Mexican peso and Norwegian krone, its highest since 2003 against the Australian dollar, and highest against the British pound since the 1980s.

  • "Dollar is safe and no one will change that, but the urgent flight to safety is a sign that we have no guidance," Juan Perez, senior FX trader and strategist at Tempus Inc., says, noting a lack of policy action from governments.

Be smart: The run on dollars is happening despite the Federal Reserve providing literally trillions of dollars in liquidity in just the past two weeks and slashing interest rates to zero.

Between the lines: Without a clear idea of whether or not the world's largest economy will pass a major stimulus package or lead a coordinated global rescue effort, confidence is fading fast in spite of the Fed's actions, Schamotta says.

  • "But we're also seeing these moves because of, and not in spite of, the Trump administration's perceived incompetence."
  • "Markets think Trump is failing to heed advice from experts and lessons learned in other countries — focusing on xenophobic characterizations of the problem and small handouts to citizens."

Don't sleep: For the week ending March 17, government money market funds drew $195.5 billion of inflows, according to Crane Data.

  • "This week is by far the largest inflow ever," Crane president and publisher Peter G. Crane tells Axios. "Nothing else even comes close."
  • Prime money market funds saw $66 billion in outflows for the week and on Wednesday night the Fed announced it would backstop the $4 trillion market.

The last word: The zealous demand for dollars was perhaps best illustrated by a report from the Wall Street Journal that "Some branches of U.S. banks and credit unions have run low on cash as customers make big withdrawals," largely in wealthy neighborhoods, sometimes reaching $100,000 or more.

  • In response, the Federal Deposit Insurance Corp. issued a press release Wednesday, reminding Americans in bold letters: "Since 1933, no depositor has ever lost a penny of FDIC-insured funds."
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