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EDF withdraws monetary liquidity. Dollar appreciation?


The dollar and the Federal Reserve (FED) have been protagonists of the market since the beginning of the Coronavirus crisis. Well, despite the gloomiest forecasts for the future of the currency, its value has not only remained stable. But it has even managed to increase over the days. Will it affect the Forex market?

This has been perfectly observed in the value of the dollar against the euro, where the American currency has experienced small gains, standing at around 1.11. A trend that is also observed in its relationship with the British pound where it is around 1.2341.

Fatalistic predictions

This development in the value of the dollar seems to go against the fatalistic predictions made by various market analysts. Who saw the accelerated issuance of money by the FED, as a threat to the value of the dollar.

An analysis that seems to make sense at first glance, because, by introducing billions of dollars into the economy in a matter of weeks, the FEDs were doing nothing more than exaggeratedly increasing the supply of dollars in the market.

And as indicated by economic theory, and has been proven in countries like Venezuela and Zimbabwe, such an increase in supply leads to hyperinflation.

But this is not the trend that we have been observing. Well, the more stimuli the FED announces, the price of the dollar increases more. And with it, the value of the main US stock indices such as the S&P 500 or the Dow Jones, which are also on the rise.

Compared to the start of the Coronavirus crisis, the S&P 500 is performing well
Compared to the start of the Coronavirus crisis, the S&P 500 is performing well

Coronavirus and its effect on the dollar

The reality is that, although it may seem contradictory at first, the appreciation of the dollar is a consequence of the Coronavirus. Well, although the pandemic has forced governments around the world to issue monstrous amounts of money, it has also made capital flee to seek refuge.

And right now, there is no better haven for investors than the United States and its currency. So, as the supply of dollars in the market by the FED has increased, so has its demand. By using large capitals the US dollar as a haven of value, investing in stocks on the New York Stock Exchange.

Therefore, now facing the rebound of Coronavirus cases in the western world, and what appears to be the acceleration of the pandemic in emerging markets such as India. We can expect a deepening of this trend, and an even stronger appreciation of the dollar in the coming days.

The FED withdraws dollars from the market

To this, the latest actions of the Federal Reserve would be added. Which seems to have intentions to slow down the levels of increase in the supply of dollars. Withdrawing the FED several billion dollars of monetary liquidity in recent days, an effort that will also have consequences on the value of the dollar.

EDF withdraws monetary liquidity Will the dollar be further strengthened? Source: Nordea and Macrobond
EDF withdraws monetary liquidity Will the dollar be further strengthened? Source: Nordea and Macrobond

Well, if just when it is likely that more capital will begin to go to the US market, seeking refuge from the instability generated by the Coronavirus. The FED is starting to rush dollars out of the money market. The result will inevitably be a currency appreciation.

However, it should not be forgotten that these are essentially short-term trends and motivated by the Coronavirus crisis. Therefore, although the dollar may appreciate immediately, in the medium and long term it is possible that an outflow of capital from the US market, together with the exaggerated issuance of dollars in recent weeks, will cause a negative impact on the US stock market. , as well as the price of the dollar.

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