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Although Fed keeps rate unchanged, why is the dollar in a dilemma again?
Lucia Han
2020-08-03 943

Abstract: The U.S. Dollar Index (DXY) decline intensified as virus is hitting U.S. economy. Are gold and silver still bullish, despite the shock in the market? The crude oil market is in turmoil and the demand for crude oil is likely to shrink. While Australia is pressed hard from every side, the Australian dollar continues to rise. The Bank of England will announce its interest rate soon, GBP has risen continuously; Bitcoin price settled above $10,000 by piggybacking on the current situation.

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The U.S. dollar fell continuously as U.S. economic data showed a heavy blow

The focus last week was on the Fed's fiscal and monetary policy and U.S. GDP data. The Fed, as expected, left its benchmark interest rates unchanged at 0% to 0.25%, but Fed Chairman Jerome Powell's dovish comments later sent shock waves through the markets. Mr. Powell also reiterated the Fed’s pledge not to raise rates. 


Hence, market analysts see the Fed's current problem as how best to use its current forward guidance and quantitative easing tools, and some expect the Fed to pave the way for yield curve control by combining forward guidance with economic targets.


 The second quarter was followed by a disappointing annual GDP decline of 32.9 percent, at least the biggest contraction since 1940. Meanwhile, new U.S. jobless claims for the week ended July 25 also poured cold water on the market. Initial claims for state unemployment benefits rose 1.43 million, up 12,000 from the previous week. 


On the negative side of the economic data, DXY fell below 93 to close at 93.455 last week, down 0.94% for the week. The S&P 500 and the Dow took a beating, falling sharply after the gloomy GDP data.


The S&P 500 closed last week at 3246.22 and the Dow at 26428.32, with the former up 0.33 percent and the latter down 0.84 percent for the week. 


Since the positive results from tech giants like Amazon, Apple, Facebook and Google offset the negative impact of the economic data, the Nasdaq continued to outshine last week, closing at 10745.27, up 2.71% for the week. 


This week, the central themes for the dollar and stocks were the approaching new stimulus bill and non-farm payrolls. On the one hand, the Senate's last day in session before its August recess is August 7, so the Congress has to agree on a final stimulus bill before then if it keeps to its schedule. On the other hand, with the U.S. economic recovery so hampered, non-farm payrolls and unemployment are high on the market's agenda. Hence, investors should be wary of such undercurrents this week.

Gold and silver fluctuate, with prospects for gold of $2,000 an ounce stronger than ever

Last week, gold and silver ended the trend of sustained growth into a small correction, but still maintained upward. The economic data released last week basically failed to have a positive impact on market risk sentiment, while amid a series of nagging questions which still linger and fuel demand for gold, Sino-US relations have plunged to a freezing point and new infections in the United States hit a record high.


 The market was gripped by panic due to the increased uncertainty after the bipartisan debate on the new economic stimulus bill and President Trump's tweeting to advocate a delay on November's presidential election, which led to another rise in demand for safe havens. As a result, gold and silver closed last week at $1974.9 and $24.341, respectively, up 3.91% and 6.95% for the week. 


On top of that, the opportunity cost of investing in gold has been reduced by sharply lower central bank interest rates and bond yields, so it seems like a good bet at the moment. However, in the short term, a large amount of capital into the gold market brought gold into the overbought state, creating a big risk of correction, whereas in the long run, an increasing number of institutional investors set foot in the gold market to support its further steady rise, and the short-term correction in gold prices appears to give other investors greater access to the gold market.

A recovery in oil prices is far from assured in a crude oil market plagued by crises.

Crude oil data from API and EIA surprised the market again last week. They reported on an incredible draw in crude oil inventories of 6.829 million barrels and 10.6 million barrels, respectively. Nevertheless, U.S. crude inventories are still 17 percent above their five-year average for this time of year, and gasoline and distillate stockpiles are increasing, EIA data show. 


Crude oil prices edged up last week on the good news about inventories. But U.S. crude and Brent crude plunged below $40 and $42 a barrel respectively after the GDP figures were released, closing last week at $40.44 and at $43.62. U.S. crude was finally down 1.94% for the week, while Brent was up 0.74%. 


Concerns about oversupply were sparked last month when OPEC began to ease its production cuts. In fact, however, current oil demand is much less optimistic than the market had expected. Demand from Asian buyers is weakening, so OPEC and Russia are trying to lure buyers by cutting oil prices in case that China, the world's largest importer, is running short of crude oil stocks. Moreover, despite the resumption of economic activity in much of the world, the resurgent virus crisis decreased demand in the oil market. 


This week, whether API and EIA crude oil inventories continue to decline, and whether the spread of the pandemic will result in a weak rise in crude oil prices are still in the spotlight.

Will the Australian dollar keep rising in the embattled country?

Hopes that the economic blockade would prevent the spread of COVID-19 were dashed last week when the resurgence of the virus in Australia again raised fears. 


Australia's consumer price index (CPI) dived 1.9 percent in the second quarter last week, the biggest decline in 72 years, and signalled deflation. It was the consequence of a COVID-19-caused sharp drop in free child care and pre-school & primary education services and a slump in fuel costs driven by the collapse in global oil prices. 


The Australian dollar fell slightly against the U.S. dollar after the CPI data, before recovering, which was not negatively affected by international geopolitical tensions. Instead, China's Purchasing Manager Index (PMI) supported the Australian dollar, pushing it above 0.72 to its highest level against the U.S. dollar in the past year. It ended last week at 0.71412, up 0.52 percent on the week. 


This week, RBA will announce its interest rates and fiscal and monetary policy, and adjustment of interest rates or action against bond yields is predicted to reverse the current state of deflation. This may lead a direct impact to the trend of Australian dollar.

Why is GBP rising against the dollar while Britain suffers gloomy economic data?

GBP had stellar performance over the past week, making 10 consecutive gains against the U.S. dollar as of Wednesday. It was last at $1.3082 per dollar, up 2.29 percent on the week. Concerns about UK unemployment have left markets pessimistic about the economic recovery, and the surge in new infections has led the government to announce more closures. 


While the UK economy is on track for recovery, it may take until 2024 to fully return to pre-coronavirus levels, according to an analysis by Ernst & Young. They cited rising unemployment, low levels of business investment and insufficient consumer confidence as three key factors that could be a drag on the UK economy in the future. 


Moreover, Brexit negotiations remain stalled. The EU planed to reach an agreement with Britain by October to give them time for ratification by the end of the year, but both sides say the talks could be deadlocked. 


The pace of Britain's recovery will be further spelled out by the Bank of England this week, when interest rates and fiscal and monetary policy are due to be published. Most economists speculate about keeping interest rates at a record 0.1% this year and next and announcing a €70bn asset purchase programme in November or December by the Bank of England.


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Bitcoin price settled above $10,000 by piggybacking on the current situation.

It was certainly an exciting week for cryptocurrency investors. The price of Bitcoin topped $10,000 for the first time since 2017. It broke $12,000 on Sunday,then droped to $10,500 approximately. 


Obviously, the surge is mainly due to the soaring price of gold and the sharp depreciation of the U.S. dollar. First, Bitcoin is seen as providing the same store of value as gold, so in the current political and economic chaos, many cryptocurrency believers opt to holding bitcoin. Second, the sharp decline in the value of the U.S. dollar has reassured many that holding Bitcoin can withstand a currency crisis. 


However, despite the increasing correlation between gold and Bitcoin, Bitcoin is of no intrinsic value, and remains to be proven as a store of value. So the rise of Bitcoin price is not so much influenced by gold and the dollar, but rather driven up by Bitcoin fanatics in the opportunity of gold's rise. 


In addition, central bank digital currencies continue to heat up globally, and multiple countries have recently stepped up the development and layout of digital currencies. On the optimistic side, the attempt to legitimise the digital currencies indirectly gives Bitcoin more potential value. 


Consequently, the upturn has indeed increased market liquidity, so cryptocurrency investors should seize the short-term opportunity and act prudently to avoid the risks brought by the violent market turbulence.


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