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Currency Market Analysis

Mar 16, 2020 | Currency Market Analysis

Global Themes

The greenback fared mixed but mostly weaker after the Federal Reserve slashed interest rates to nearly zero. The dollar tumbled around one and two percent against the euro and yen but rose against commodity and emerging market counterparts. Despite a global wave of monetary easing, investors remain on edge about the widening coronavirus pandemic that is pumping the brakes on the world economy. Days ahead of its Wednesday policy meeting, the Fed on Sunday fired a monetary bazooka by lowering its key rate by a full percentage point to nearly zero and relaunching quantitative easing in a bid to exert further downward pressure on borrowing costs to spur consumers and businesses to spend to help stave off a deeper slowdown. The Fed’s latest emergency action followed rate cuts by Canada Friday and New Zealand earlier Monday. 


The euro whipsawed in central bank-driven trade. The euro slipped earlier Monday to two-week lows against the greenback after a rate cut by the Fed was as big as it was surprising. The Fed cut rates by a massive 100 basis points to a new range of 0.00% to 0.25%. While markets had positioned for a big rate cut this week from America’s central bank, the early timing – arriving Sunday instead of Wednesday – caught markets off guard which seemingly aggravated investor anxiety rather than allay it. 


Canada’s loonie favored four-year lows as global stocks and oil markets deepened losses. An 8% slide drove crude below $30, a level not far from four-year lows hit a week ago. The negative shocks from the coronavirus led the Bank of Canada on Friday to slash its key interest rate by another 50 basis points to 0.75% from 1.25%. While economic data may take a backseat to coronavirus headlines, any softening in Canadian consumer inflation on Wednesday would keep the door open to further loonie-negative interest rate cuts by the BOC.


Data showing a record plunge in the Empire State index to -21.5 in March validated the Fed’s aggressive actions to chop borrowing rates to nearly zero. The data offered an early look at the economic toll from the coronavirus which has raised the risk of recession. The Fed’s big weekend rate cut came ahead of policymakers Wednesday meeting at which officials are expected to unveil fresh forecasts for growth and inflation. The dollar fell in knee jerk reaction to the Fed’s cut. But the buck’s status as the world’s reserve currency could limit bouts of weakness.


Sterling pared losses after falling to fresh five-month lows Monday. The pound benefited from the dollar’s Fed-inspired retreat. Britain today gets a new central bank governor in Andrew Bailey who succeeds Mark Carney. Sterling sentiment has dimmed over recent days as growing anxiety over the coronavirus has spurred a flight to safety in rival currencies like the U.S., Japanese and Swiss currencies. While higher, sterling gains may be tough to sustain amid such a risk averse climate. 

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