There’s still some life in the U.S. dollar.
After slumping last week to its lowest level in more than two years, the ICE U.S. Dollar Index DXY, -0.25%, a measure of the currency against a basket of six major rivals, rose 0.7% on Tuesday and is up 1.2% for the month as investors fleeing the carnage in the U.S. stock market dumped a range of risky assets for the safety of the greenback and other traditional havens.
“It looks like the comments about the death of USD (U.S. dollar) were premature — when the going gets tough, investors buy dollars,” said Marshall Gittler, head of investment research at BDSwiss Group, in a note.
The tech-heavy Nasdaq Composite COMP, +2.67% plunged from a record close to a correction — a pullback of 10% — in just three days, dragging down the broader market. Stocks were bouncing back Wednesday, with the S&P 500 SPX, +2.17% up 1.7% , the Dow Jones Industrial Average DJIA, +1.96% up around 470 points, or 1.7%, and the Nasdaq up 2.3%.
The dollar index remains down 3.3% for the year to date and more than 9% from its March high, when stocks slumped as the economy reeled from the coronavirus pandemic, sparking a global scramble for dollars. Since then the Federal Reserve has come to the rescue, expanding existing dollar swap lines with major central banks and establishing new ones.
The dollar’s subsequent slide from the March highs has been seen as a boon for U.S. and global equities, as well as global economic growth, but has also sparked debate over whether the currency was seeing the slow erosion of its global appeal.
And dollar weakness hasn’t been embraced by global policy makers. A meeting of the European Central Bank’s Governing Council on Thursday is expected to see significant attention paid to the dollar’s weakness versus the euro EURUSD, +0.34%. The euro briefly pushed above $1.20 versus the dollar last week, then turned south after ECB chief economist reiterated that the exchange rate “did matter” when it came to setting monetary policy.
Read: The ECB decision is coming — here’s what to expect
A weaker dollar makes it harder for the ECB to meet its goal of lifting inflation toward its target of near but just below 2% — a goal it has undershot by a wide margin for years and isn’t expected to meet soon.
See: ‘Cold currency war’: Dollar bounces as ECB raises alarm on rising euro
Some currency watchers see the return of broader financial market volatility this week, uncertainty heading into the U.S. presidential election, and ECB discomfort with a stronger euro, all paving the way for near-term upside in the dollar.
“Looking forward, we expect USD to rally into the U.S. election on a rebuilding of FX risk premium amid elevated downside market risk, one-way positioning, improved relative U.S. data outlook and bullish seasonals,” wrote strategists Ben Randol and Athanasios Vamvakidis at BofA Securities, in a Wednesday note. “The ECB this week could be a catalyst.”
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