Mar 6, 2020 - Economy & Business

The coronavirus outbreak could finally sink the dollar

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Data: FactSet; Chart: Axios Visuals

The dollar is buckling under the weight of expected rate cuts from the Fed and record-low U.S. Treasury yields.

The state of play: It has fallen to its weakest level when valued against a group of global currencies since the beginning of the year, and experts think there could be much further to go.

Why it matters: Multinational companies prefer a weak dollar because it makes U.S. exports cheaper overseas, but it also makes imported goods more expensive for American consumers and can push inflation higher.

  • Firms have shown a decreased ability to raise prices over the last decade, so a weaker dollar could instead put pressure on companies' bottom lines, hurting retailers and small businesses already reeling from the U.S.-China trade war and coronavirus outbreak.

What's happening: As Treasury yields sink further into record-low territory the so-called carry trade, in which traders buy dollars to benefit from U.S. yields being higher than in other industrialized countries like the eurozone and Japan, is starting to decline.

  • The Fed's surprise 50 basis point rate cut earlier this week has triggered increased expectations for more cuts, with Fed funds futures pricing U.S. rates about 100 basis points lower than their current level.

Watch this space: Yields on benchmark 10-year U.S. Treasury notes again hit a record low, touching 0.92% on Thursday, less than 160 basis points above comparable German government debt, the European standard.

  • That's the narrowest the spread has been since July 2016. (Yields fell further Friday morning.)

Breaking it down: "There’s a belief that [U.S. and European rates] can converge or get pretty close to convergence pretty quickly because the Fed has suddenly become quite aggressive," Kathy Jones, chief fixed-income strategist at Charles Schwab, tells Axios.

  • Kathy Lien, managing director of FX strategy at BK Asset Management, points out that the European Central Bank and Bank of Japan already hold negative interest rates, "so even if they do move it’ll only be by about 10 basis points, whereas the Fed can cut rates significantly from their current levels."
  • "It's all about the expectations of future policy," Lien said.

Go deeper: Coronavirus doesn't tell the full story behind Dow's plunge

Go deeper

Quantitative easing's return sends bond yields soaring

Data: Investing.com; Chart: Axios Visuals

Longer-dated U.S. Treasury yields have bounced higher in recent days, with the benchmark 10-year note fully reversing course and rising to more than double its lowest level on Tuesday.

What's happening: The announcement of $1.5 trillion in repo injections on Thursday by the New York Fed followed two announcements about increasing the amount of cash it was injecting in its repo operations this week. The deluge has given yields a significant bounce.

Bond market returns to normalcy, traders ignore stock gains

Illustration: Rebecca Zisser/Axios

The Treasury market is getting back to normal after the Fed's massive bond-buying announcement earlier this week.

What to watch: Yields on Treasury bills were negative out to three months, closing in the red late Wednesday, as traders continued to favor paying to loan the government money over buying longer-dated bonds.

The market is already pricing in a U.S. recession and QE from the Fed

Data: U.S. Treasury; Chart: Axios Visuals

The U.S. fixed income and Fed fund futures markets are not only pricing in a U.S. recession and the Fed cutting interest rates to zero, they are now pricing in quantitative easing and asset purchases, analysts tell Axios.

What's happening: After U.S. 10-year yields fell to 0.32%, their lowest level on record, and yields on the 30-year bond dropped to 0.72%, investors began pricing in a bond-buying program from the Fed that would target longer-dated Treasuries.