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Dollar in Demand; Sterling Weighed by Downgrade

·2-min read

By Peter Nurse - The dollar is back in demand Monday as hopes of an early end to the shutdown which has paralysed the U.S. economy were dashed over the weekend, prompting some traders to head back to the greenback safe haven.

At 3:55 AM ET (0815 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 98.965, up 0.4%. EUR/USD traded at 1.1078, down 0.6%, USD/JPY flat at 107.86.

On Sunday, President Donald Trump extended restrictive social distancing guidelines to the end of April, bowing to public-health experts who presented him with even more dire projections for the expanding coronavirus pandemic.

It was a stark shift in tone by the president, who only days ago discussed reopening the country in a few weeks.

Additionally, GBP/USD traded at 1.2350, down 0.9%. Sterling has made something of a comeback in the last week or so, helped by the injection of vast amounts of dollars by the Federal Reserve into the system to stop a funding crunch.

However, more losses look likely for the pound going forward, especially after Fitch downgraded its credit rating on the U.K. by one notch to AA- from AA on Friday. The credit agency cited the significant increase in fiscal spending as a result of the coronavirus, as well as the uncertainty regarding the post-Brexit trade relationship with the EU.

This is the first downgrade of a sovereign on the back of the coronavirus and the increase in fiscal spending.

Another currency on the move on the back of a ratings decision is the South African rand, with USD/ZAR rising over 2% to 18.01 after Moody’s downgraded the sovereign to junk status.

South African government bonds will now be excluded from the FTSE World Government Bond Index, which will mean further capital outflows as fund managers with investment grade mandates will be forced to sell these bonds.

Finally, the sharp drop in the price of oil - Brent is down 5% Monday - continues to weigh heavily on the currencies of countries that rely heavily on the commodity for revenue.

At 3:15 AM ET, USD/NOK traded 1.6% higher at 10.55, while USD/RUB climbed 1.6% to 80.06.

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