Dollar maintains gains after weeks of rallying

LONDON (Reuters) – The dollar firmed on Thursday but paused its strong rally of recent weeks after the Federal Reserve helped U.S. currency liquidity in financial markets by making it easier for other central banks to access the greenback.

Markets have been spooked since U.S. President Donald Trump’s warning on Tuesday of a painful two weeks ahead in fighting the coronavirus, even with strict social distancing measures.

The United States now has over 200,000 confirmed COVID-19 cases – the most worldwide – which has sent investors flocking to safe-haven assets such as the U.S. dollar.

Still, analysts do not expect the dollar rally of recent weeks to continue further, following the Federal Reserve measures in March, when it established dollar swap lines with other central banks and let them enter repurchase agreements.

The cost to borrow dollars in the euro and yen funding markets fell considerably after the Fed liquidity injections, with three-month FX swap spreads snapping back from 2008 global financial crisis levels last month.

Costs blew out in mid-March as stress in the dollar funding market caused by the coronavirus pandemic led to a global scramble to secure dollar funds. EURCBS3M=ICAP JPYCBS3M=ICAP

“Flow-wise this must mean a preference out there to receive dollar Libor, which translates into a bias to lend dollars,” said Padhraic Garvey, regional head of research at ING.

The euro traded down 0.3% at $1.0934 as the dollar advanced. EUR=EBS The greenback also rose against the Japanese yen, trading last up 0.2% at 107.38 yen JPY=EBS, though the Japanese currency protected well its safe-haven status this week, advancing against its U.S. counterpart.

The Fed’s efforts to improve dollar liquidity have turned out to be beneficial for other currencies too, such as the Norwegian crown, which advanced further on Thursday to hit a three-week high of 11.1820 against the euro. It was last trading up 2% at 11.24 EURNOK=D3

“The Norwegian crown is the least liquid currency in the G10 space so when a crisis hits, it gets hammered. So the improvement in dollar funding has already started manifesting itself in the crown, which has rallied sharply so far this week,” said Petr Krpata, chief EMEA FX and IR strategist at ING.

On top of that, “the crown is the cheapest currency in the G10 space”, so is appealing, he said.

To combat the economic slowdown inflicted by the pandemic, the Fed said on Wednesday it was temporarily easing its leverage rules for large banks by exempting certain investments from a key leverage calculation.

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