Dollar Folds into Holiday Weekend as Federal Reserve Fights to Save Crumbling Labour Market 

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The Dollar fell broadly on Friday, folding a strong earlier hand as the Federal Reserve (Fed) pounced on a crumbling labour market in an apparent effort to save the hard-won job gains of recent years from the coronavirus and resulting shutdown, which claimed another six million livelihoods this week.

U.S. firms shed more than 6.6 million workers last week, the Department of Labor said in a 13:30 announcement on Thursday, which follows the loss of more than 10mn jobs in the prior fortnight. That regular and scheduled release was accompanied by a separate, surprise statement from the Fed, which has swung its policy bat again and this time knocked the ball out of the park. 

"This on its own could push the April unemployment rate up to 14%, but with more job losses likely in coming weeks, it will peak even higher," warns James Knightley, chief international economist at ING, referring to the jobs data. "That said, we remain hopeful that the fiscal stimulus, with initiatives to encourage employers not to lay-off staff – will start to bear fruit and keep unemployment below the 20% figure Treasury Secretary Mnuchin feared." 

The Federal Reserve says it will provide up to $2.3 trillion in loans to companies and households, an amount that's more than 10% of U.S. GDP to "bolster" the effectiveness of the myriad facilities it's vreated in order to support companies and households through the coronavirus shutdown. This is after Washington legislated for a $2.2 trillion fiscal support package that included helicopter money for households as well as uber cheap and yet-still subsidised loans to companies who might otherwise make workers redundant. 

Lawmakers are attempting to reach agreement on an additional support package worth up to $500bn although differences between parties on the level of relief necessary for small businesses has prevented progress this week. 

The Fed has told commercial banks that if they extend credit to companies under its various schemes,which include the Small Business Administration's Paycheck Protection Program and the Main Street Lending Program, then it will effectively buy those loans straight off the commercial banks. The commercial lenders will still need to manage the loans though. This comes on top of an "unlimited" programme of government bond buying and earlier decisions to cut the Fed Funds rate to the 'zero lower bound.'

This should boost incentives to participate in the scheme and reduce the chances of credit being constrained to other areas.

Powell emphasised that the Fed only has lending powers. It does not have spending powers and cannot grant money, adding that there will be many “entities of various kinds that need direct fiscal support rather than a loan they would struggle to repay”.

"Like other countries, we are taking forceful measures to control the spread of the virus. Businesses have shuttered, workers are staying home, and we have suspended many basic social interactions. People have been asked to put their lives and livelihoods on hold, at significant economic and personal cost. We are moving with alarming speed from 50-year lows in unemployment to what will likely be very high, although temporary, levels. All of us are affected, but the burdens are falling most heavily on those least able to carry them," says Federal Reserve Chairman Jerome Powell, speaking to The Brookings Institution. 

Household relief is being channelled through commercial banks but under other programs the Fed is actively involving itself in the primary as well as secondary markets for corporate bonds and other assets, which is truly unprecedented. Using specially created limited companies of its own, the bank will provide "liquidity" to others by participating in primary market auctions and by bidding in the secondary market (where the riff-raff does investing and trading).

In addition, the bank will buy units of exchange traded funds (ETF) which invest themselves in secondary market corporate bonds, taking the leader of the central bank crowd a step closer to propping up stock markets through the acquisition of shares. Owning ETFs requires the purchase of shares that trade on stock exchanges, although those are shares in investment funds rather than typical publicly quoted companies. This bolsters not only the Fed's earlier actions but also the market's faith in the so-called 'Fed put'.

"The third straight week of multi-million claims numbers takes the total over the past four weeks to 17.1M," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "We reckon May payrolls will be reported falling by about 19M, driving the unemployment rate to 16% if none of the newly-unemployed leave the labor force. That seems unlikely, given that the labor force reportedly dropped by 1.6M in March, when household employment fell by 3.0M." 

Commercial revenues have fallen sharply amid the coronavirus shutdown so firms are laying off workers, which is having a knock-on effect on Main Street by creating household income deficits that could further imperil the economy and financial system if not addressed. The unemployment rate has reversed almost its Trump era fall from 4.6% to 3.5% but could still go much higher. 

ING's Knightley says the jobless rate could rise around 10 percentage points more, to 14% by the time that all is said and done, while Pantheon's Shepherdson says it could hit 20% unless a high portion of the newly redundant workers tell survey compilers they aren't actually looking for new work. The jobless must be actively looking for a new role in order to be baked into the unemployment rate, which is a real curveball for economy watchers given that state-wide 'lockdowns' are what's eating the jobs. 

All matter greatly for the economy, which is at risk of its largest ever slump in the second quarter given how the coronavirus has made a ghost town of 'the city that never sleeps' and brought other parts of the U.S. to a standstill. The U.S. has leapfrogged European countries to become the epicentre of the coronavirus pandemic in recent weeks, with 432,438 cases noted by Johns Hopkins University on Thursday. Nearly half of those cases are in New York. 

"The dollar fell after data showed a bigger than expected rise in weekly jobless claims, a decline that gained traction after the Fed delivered another strong dose on monetary stimulus to help steady America’s economy and global financial markets," says Joe Manimbo, a currency strategist at Western Union.

Powell also said Thursday there's no limit to how long the Fed can go on with its extraordinary policy support to the economy and that inflation is not the bank's foremost concern in the current environment. 

The greenback went from hero to zero in the aftermath of the announcement, giving up strong gains over many major rivals to trade lower against all ahead of the holiday weekend beginning on Friday. 

The Dollar index was down half a percent while the commodity-backed Australian and New Zealand Dollars clocked up the largest gains over the greenback, indicating that investors see the move being positive for the global economy and a net-negative for the Dollar. 

"The market events in March made it very clear to the many doubters that the USD is the safe haven of choice for many investors," says Jane Foley, a senior FX strategist at Rabobank. "As yet we have only had a glimpse of the disastrous economic conditions which can be expected to present themselves in the weeks and months ahead and have had very little time to process the various tentacles of the crisis. As such, we expect to see further bouts of USD strength over the coming quarter."