DXY struggles as risk appetite picks up, 100 level barely left in-tact

• US dollar struggles in a risk-on environment.
• All eyes on nations relaxing easing measures and money flows.
• The Fed could offer some downside risks to the greenback.

The US dollar has been struggling in recent sessions due to some optimistic tones coming from news that some nations, including some US states, are on the verge of easing their lockdown measures and getting businesses back to work. At the time writing, DXY is trading at 100.09, -.20% having travelled from a high of 100.32 to a low of 99.93. 

Economies seeking the road to recovery

COVID-19 has killed more than 206,000 people globally, according to Johns Hopkins University data. We have seen almost 3 million confirmed cases reported which would be including 965,000 in the US. More than 54,000 have died in the US (a number approaching the 58,220 Americans killed in the Vietnam War from 1955 to 1975). Tight lockdowns have been seen as a blunt but effective tool to halt infections until a vaccine is developed.

However, if a "plateau" has been reached as the confirmed cases near 1 million, US states that have already announced plans to relax social distancing restrictions will be enthused and seeking to get their economies on the road to recovery ASAP. Most states are in favour of a slower, more gradual approach. On Monday morning, Dr. Deborah Birx warned that social distancing "will be with us through the summer."

France, Italy and Spain, the three of the hardest-hit countries in Europe with the highest numbers of confirmed cases of Covid-19 in the world are also making their preparations to loosen coronavirus restrictions – a template for the rest of Europe. A number of other European countries, including Greece, Malta and Belgium have already announced a tentative easing of restrictions. However, some would say it is too soon and it risks the second wave of new COVID-19 cases. Hong Kong’s top epidemiologist has warned against easing lockdowns in Europe too soon, saying “you need a sledgehammer” to bring down the rate of infections first.

Looking through the contagion risks

Nevertheless, financial markets are looking through the risks, in desperate need of a resolution to what had nearly shaved off 50% of the progress made since 2009's GFC. As a reuslt, there was a flight to the US dollar with a shortfall of offshore dollars and a squeeze in liquidity in the money markets. However, a collaboration of US banks came n the scene to stem the tightness of FX dollar swap lines and the dollar consequently weakness from the 103 handle and to below 100. A low of 98.20 was made prior to the latest ebbs and flows resulting in a better bid dollar again. The fact that the dollar can hold on to its strength regardless of the amount of QE and supply is tantamount to the level of risk-off in the markets still.

It will be interesting to see, barring a slump in oil prices again, whether the dollar can now finally unwind as economies getting back to work. This should imply less safe-haven support to the dollar. Looking ahead for this week, in its policy announcement scheduled for Wednesday, the Federal Reserve will likely give the markets some further insight on its various quantitative easing schemes and emphasises its pledge for more action if necessary to smooth market functioning. If there is optimism, then this too should weigh on the greenback. 

DXY levels