Why Does USD Sometimes Fall When Equities Rise?

This only occurs when the market is viewing the USD as a safe haven currency. When it happens you'll notice the USD trading slightly differently to normal and rising and falling in the opposite way to assets like equities.
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Giles Coghlan
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The USD Will Sometimes Fall When Equities Rise

Just had a quick question from Ryan. Why is it that the US dollar falls when equities rise during the COVID-19 crisis. Well, the reason is Ryan, at this particular moment in time the US dollar is acting as a safe haven currency.

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So when we’re seeing equity markets rising, we’re seeing the US dollar selling off as you will expect in a safe haven environment.

So in a sense you’re the people who have liquidated the long equity commodity positions. They’ve converted it into the most liquid currency which is the US dollar.

So then we’ll see equity markets rising again with what we’re seeing as that dollar strength is dissipating as the dollar’s going into buying different commodities, different equities, and you can see that the equity markets are agreeing at the moment after the Fed announced that really strong rescue package, $2.3 trillion dollars of loans and different facilities to really help stimulate the economy. So out of relief equity markets have rallied and the US dollar is falling.

Now, if we start to see equity markets falling again, on a risk off environment, we’d expect to see the dollar moving up and strength.

So at the moment, during the COVID-19 crisis, the best way to understand the movement of the dollar and its day-to-day movements is consider it a safe haven currency.

Sometimes US dollar does operate as a safe haven currency alongside the Japanese yen and the Swiss frank and right now the dollar is having very similar behavior. We can see weakness in the Swiss frank and the Japanese yen if we just take a look at the commodity currencies, we can see that they are broadly up on the day and the Swiss frank and the Japanese yen are weak as is the US dollar. So that is the reason the US dollar falls when equities rise during the COVID-19 crisis.

I hope that helps, Ryan.

 

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