U.S. Dollar Back in Control, Further Gains Likely

- USD back to winning ways
- Tends to outperform during recessions
- Only medical breakthrough likely to halt USD advance

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The Dollar is the best-performing major currency of the past month thanks to a deteriorating global economic outlook linked to ongoing lockdowns aimed at preventing the spread of the coronavirus, and until a convincing medical solution to the outbreak is found further gains are likely.

Driving Dollar strength ahead of the weekend were some dire labour market statistics out of the U.S. on Thursday which suggests the economy is in the process of sustaining significant structural damage from the nation-wide lockdowns that are yet to have a discernibile impact on the growth of new cases in the U.S.

"The surge in U.S. initial jobless claims to 6.6m yesterday suggests he US will soon enter a deep recession if it isn’t already in recession. The deterioration in the U.S., and global, economy will support USD," says Kim Mundy, Currency Strategist at Commonwealth Bank of Australia.

New U.S. welfare claims rose at a record rate last week, according to Department of Labor figures, which puts the world's largest economy on course for a double-digit unemployment rate and huge falls in GDP up ahead.

6.64mn Americans made new applications for welfare payments during the week to last Friday, up from the previous upwardly-revised record of 3.28mn during the prior week and with many state authorities having cited the coronavirus and impact of efforts to contain as being behind the increase.

"[This] has a strong claim to being quite literally the worst single economic data release of all time, in terms of its significance for both the U.S. economy and global markets," says Ranko Berich, head of market analysis at Monex Europe.

The data aided further gains in the Dollar, which is in fact now the best-performing major currency of the past month. "The USD is a countercyclical currency, it lifts when the global outlook deteriorates," says Mundy.

"We are not surprised at this juncture to see the dollar remaining strong. Uncertainty remains high and global recessionary conditions will benefit the Dollar," says Derek Halpenny, Head of Research at MUFG.

Above: USD performance for the past month

"As dramatic as the past two weeks’ increase has been, we doubt we are anywhere near the peak," says Mark Vitner, Senior Economist at Wells Fargo. "Numerous states report they are still having a difficult time processing the flood of claims."

Vitner cites the case of New York where it was reported that more than 7.8 million calls inquiring about unemployment benefits during the week ended March 28, were made, compared to around 50,000 calls in a usual week.

"Given the magnitude of that increase, the fact that there were ‘only’ 366K claims officially reported in New York State suggests that when
the processing logjam clears, there will be a much larger surge," says Vitner. New York received 1.2 million calls on Monday, March 30 alone.

However, the peak in jobless claims should come in a relatively short space of time, when compared to the more gradual lag in previous recessions.

"The abrupt halt to economic activity that occurred, as more than three-quarters of the U.S. population fell under stay-at-home orders, means
that a great deal of the rise in jobless claims is likely to be compressed into a relatively short period of time, with initial claims likely peaking in April," says Vitner.

The outlook for the global financial markets and the world economy remains negative with deaths from coronavirus continuing to mount with little sign that the unprecedented lock-downs in Western economies is about to end.

We feel that for now the most significant 'game changer' would be news of a successful vaccine trial, or some other form of medical solution that significantly brings down death rates. This could well turn the Dollar lower.

By all accounts such an outcome is however still some way off and therefore the Dollar has scope to gain further, but beware the element of surprise.

MUFG's Halpenny says that should lockdowns start to reverse in the third quarter of 2020, an abundance of USD liquidity - thanks to the gargantuan effort of the Federal Reserve to boost the supply of dollars into a creaking global financial system - will start to weigh on the Dollar.