World News

Dollar eases as central banks pledge dollar liquidity

By Karen Brettell

NEW YORK (Reuters) – The dollar eased on Friday as six major central banks announced a coordinated action to enhance liquidity in the currency, but bounced off its lows in afternoon trading as stocks weakened.

The greenback has staged a ferocious rally this week as investors scrambled to obtain the currency, gaining 4.32% in its biggest weekly rise since the 2008 financial crisis.

Currencies from the Australian dollar <AUD=> to the British pound <GBP=> tumbled to multi-year lows after coordinated rate cuts by central banks and billions of dollars of fund injections failed to calm panicky markets.

On Friday six major central banks announced coordinated action to enhance liquidity in the greenback by increasing the frequency of their currency swap operations to occur daily.

“The enhancement of coordinated USD dollar liquidity operations on 15 March was already a significant step building on the experience of the Great Financial Crisis, but today’s shift to daily operations is unprecedented,” said Frederic Ducrozet, a strategist at Pictet Wealth Management.

The U.S. dollar rose to 1.03, the highest since January 2017, against a basket of currencies <=USD> through a week when investors have liquidated everything from stocks to bonds to gold and commodities.

It was last 102.65, down 0.32% on the day.

“For many countries with borrowings in dollars, the massive depreciation in their domestic currencies, and strength in the dollar, has been increasingly threatening at a time when most emerging market and developed-world economies are either headed to or are already in recession,” analysts at Action Economics said on Friday in a report.

Gauges of expected market swings in the euro for one-month maturities <EUR1MO=> edged lower, after hitting a more than three-year high on Thursday.

Some funding indicators, however, showed continuing strains in the market.

The premium over interbank rates that investors were paying to swap yen for one-year dollar funding <JPYCBS1Y=> fell on Friday but remained at elevated levels at around 55 basis points.

The FRA-OIS spread <USDF-O0X1=R>, a barometer of risk in the interbank market, edged higher on Friday to 99 basis points.

“While FX volatility is lower and currency basis swaps are less scary for example, the situation remains stressed,” said Kit Juckes, a strategist at Societe Generale in London.

(Additional reporting by Saikat Chatterjee and Dhara Ranasinghe in London; Editing by Marguerita Choy and Tom Brown)