US Dollar Drop Before FOMC Meeting May Not Last


  • US Dollar under pressure as credit market stress continues to ease
  • Pre-positioning ahead of the FOMC policy decision may be at work
  • Grim earnings and economic data, wait-and-see Fed may lift USD

The US Dollar faced broad-based selling pressure at the start of the trading week as funding costs continued to decline, easing worries about credit access. That has cooled cash demand, a key source of support for the ultra-liquid Greenback amid the coronavirus outbreak.

Indeed, the TED spread – a measure of USD funding cost – has dropped to the lowest level in six weeks. At just under 29 basis points, it is now below the average that has prevailed in the aftermath of the 2008 global financial crisis (approximately 33bps).

Chart created with TradingView

Newswires are attributing the easing credit market backdrop to hopes for a turn toward improvement in the battle against Covid-19. The daily cases count appears to be showing some tentative signs of stabilization and some major economies – like Germany, France and Italy – are easing lockdown rules somewhat.

Daily tally of Covid-19 cases appears to be stabilizing

Source: Center for Systems Science and Engineering (CSSE) at Johns Hopkins University


Prepositioning ahead of the upcoming FOMC rate decision may also be at play, with markets holding out hope for more stimulus. That seems unlikely: the Fed’s success thus far will probably keep officials on the sidelines, wanting to save as much as ammunition as possible in the event that credit stress returns.

Indeed, the central bank conspicuously signaled it will slow the pace of QE uptake to $10 billion per day through May 1, down from about $15 billion in the prior week. That seems to suggest officials feel no sense of urgency to up the ante in the near term.

That might mean the markets are in for disappointment, warning that investors’ currently rosy disposition may not prove lasting. A flood of heavy-duty Q1 corporate earnings reports begin to cross the wires Tuesday, with the grim tone in the accompanying guidance threatening sentiment even as the Fed idles.

Thus far, with about a quarter of the bellwether S&P 500 having reported, results trail baseline forecasts by about 5.3 percent. Another wave of lackluster results and coupled with now overarchingly soft economic data flow and a Fed willing to adopt a wait-and-see approach might put USD back on offense.

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— Written by Ilya Spivak, Currency Strategist for

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