- The US dollar index was little changed as the number of coronavirus cases approached 100,000.
- Analysts expect the number of new infections and deaths will increase as states reopen.
- The weak numbers increase the probability of negative interest rates by the Federal Reserve
The US dollar index (DXY) was slightly unchanged as the number of coronavirus cases on the country approached 100,000.
US dollar index reacts to coronavirus cases
The number of coronavirus infections and deaths in the United States continued to swell during the weekend.
According to the government, the number of confirmed infections rose to more than 1.6 million people while the deaths are approaching 100,000. That makes the US the worst-affected country in the world.
New York, New Jersey, Illinois, and California are the worst-affected states with more than 730,000 infections.
US numbers are surprising for two reasons. First, its number of infections are about a fifth of the total of global infections. Similarly, the deaths are a third of the global total. Second, as the biggest economy and one of the most advanced, the US has lagged poorer countries.
Analysts believe that the number of cases and deaths will increase in the US as more states rush to reopen their economies. They argue that the US has lagged in testing, which is essential in preventing second infections. They also blame the lack of leadership and the political differences between Democrats and Republicans as key factors.
Risks for the US dollar
The surging number of infections is risky for the US dollar for two reasons. First, it extends the period in which the US can reopen its economy. As a result, we expect weak economic data from the country for a longer period. This is unlike China, where numbers have started to improve. The manufacturing PMI, exports, and crude oil consumption has continued to rise.
Second, it leaves the Federal Reserve with limited options. The bank has brought interest rates to near zero and launched its most aggressive quantitative easing program yet. For example, the bank has acquired assets worth more than $2 trillion in the past two months. It is even buying corporate bonds from fallen angel.
As a result, many analysts are talking about negative interest rates in the United States. While Jerome Powell has ruled them out, there are chances that he will implement them. In fact, the Fed funds futures, which are a gauge of where the markets expect the Fed’s benchmark overnight lending rate to be, have begun predicting a negative rate environment in December.
Analysts expect data from the US will continue to deteriorate. They expect the new home sales to have dropped from the previous 627k to 490k. Also, analysts polled by Refinitiv expect that durable goods orders dropped by 14 per cent in April. They also expect the number of initial jobless claims to remain above 2 million.
US dollar index (DXY) technical outlook
The US dollar index (DXY) is trading at 99.84, which is slightly below last week’s high of 100.87. On the daily chart, the price is along the 61.8% Fibonacci retracement level. It is also inches above the 50-day and 100-day exponential moving averages. Therefore, I expect the price to attempt to test the 100 level provided it remains above the EMAs and the 61.8% retracement level.