March 24, 2020 / 12:08 PM / 12 days ago

REFILE-FOREX-Dollar falls broadly as Fed stimulus calms panicky markets

(Refiling to fix spelling of FX strategy chief’s first name in 3rd paragraph to “Vaselios” instead of “Vaselious” in)

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, March 24 (Reuters) - The dollar fell broadly on Tuesday, sliding for a second consecutive day after the U.S. Federal Reserve stepped up measures to shield an economy reeling from emergency restrictions on commerce to fight the coronavirus.

Against a basket of its rivals, the dollar fell 1% to 101.04, down more than 1.5% from Monday’s highs and having hit a more than three-year high of 102.99 on Friday. It was on track for its biggest single-day drop in three weeks.

“The Fed’s measures are unprecedented and they have been extremely proactive in preventing this external shock from morphing into a wider funding crisis,” said Vasileios Gkionakis, head of FX strategy at Lombard Odier.

The Fed announced various programmes including purchases of corporate bonds, guarantees for direct loans to companies and a plan to get credit to small and medium-sized business.

While the Fed’s latest measures were seen to have effectively broken the spreading freeze in the dollar funding markets in the short-term, the shock to the real economy is expected to last for a far longer period with latest PMI data offering a glimpse of the pain.

Ulrich Leuchtmann, head of FX and commodity research at Commerzbank said in a note that as more economies enact draconian measures to lock down their economies, the global economy would be massively constrained in the near future and markets could quickly turn back into risk-off mode.

Business activity collapsed from Australia and Japan to Western Europe at a record pace in March as nations locked down to curb the spread of the disease, shuttering shops, restaurants and offices.

IHS Markit’s flash composite Purchasing Managers’ Index (PMI) for the euro zone, seen as a gauge of economic health, plummeted to a record low of 31.4 in March, its biggest one-month fall since the survey began in mid-1998.

Notwithstanding the collapse in the real economy, the euro surged on Tuesday with traders reporting demand from insurance firms and asset managers on expectations the latest round of stimulus would calm panicky markets.

Against the dollar, the single currency jumped 1.5% to $1.0880, a three-day high.

JP Morgan strategists said in a daily note the repeated rounds of stimulus from global policymakers indicate that signs of infection or death rates peaking in the most troubled areas could fuel some demand for risky assets.

Some more relief was also evident in dollar funding markets with measures of short-term funding indicators such as euro-dollar FX swaps for three-month maturities stabilising around 11 bps after blowing out to more than 100 bps last week.

The British pound also rose 1.6% to $1.1742, up more than two cents from its 35-year low of $1.1413 set last week.

Trading remained volatile, with the Australian dollar rising 2.0% to $0.5952, extending its recovery from a 17-year low of $0.5510 touched last week.

Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano in TOKYO; Editing by Kirsten Donovan

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