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Investors shun commodities in favour of US dollar over renewed virus worries

Currently, the US is seen to be doing better than Europe and market players are moving out from the euro to the dollar.

September 26, 2020 / 12:19 PM IST

Global coronavirus cases have been rising without any signs of containment and have breached the 3.2-crore mark. While the virus risk is omnipresent, market players have been rattled by resurgence of cases in Europe, which has deepened worries about tighter restrictions and triggered a rush towards the safety of the US dollar.

Both the UK and France reported record-high new coronavirus cases on September 24. Cases are also going up in Spain, The Netherlands and other countries. The rise in infections has caused countries to impose fresh restrictions, dampening economic outlook for the region.

The immediate impact of new cases and restrictions was a shift from riskier assets to safe havens. Equity and commodity markets came under severe selling pressure while safe haven like the US dollar benefitted.
US DJIA index slumped to its lowest since early August while copper slumped to a month’s low and gold plunged to July lows.

The US dollar index surged to July highs as market players shunned European currencies in favour of the safety of the US currency. Mixed economic data and increasing uncertainty about Brexit has also pressured European currencies.

We are in a situation where the US dollar is being seen as the preferred asset, however, the situation was opposite a few weeks back. The US dollar index slumped to 2018 lows at the start of September as market players shunned US assets amid rising virus cases and uneven economic recovery.

On the other hand, the virus situation in Europe was well contained while the EU's reform package revived economic outlook.

The asset flow shows that market players are linking economic growth with the virus situation. Currently, the US is seen doing better than Europe and we are seeing market players moving out from the euro to the dollar.

However, the virus situation in the US is not completely under control yet. Mixed economic data highlights the uneven pace of recovery, with the sluggish labour market activity a major cause of concern.

Adding to the concerns about the health of the US economy is the delay over additional stimulus measures. Policymakers continue to disagree over the size and the scope of the new stimulus package.

The Fed's emphasis on fiscal stimulus has fuelled expectations that no fresh monetary policy measure may be considered soon.

After months of selloff, the dollar index is showing some signs of recovery and this has pressurised commodities at large. While some extended gains can't be ruled out with focus on the virus situation in Europe, any sustained rise in the dollar may not come unless the US economic activity picks up significantly.

(Ravindra Rao is the VP - Head Commodity Research at Kotak Securities.)

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Ravindra Rao
Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Sep 26, 2020 12:19 pm