US Dollar struggling

The EUR/USD parity has soared spectacularly in recent days in the wake of the European summit in Brussels. While the single currency was worth $1.1229 at the beginning of the session on July 1, it almost touched $1.1800 on Monday. The euro had not moved as dramatically since the outbreak of the COVID-19 crisis in mid-March, and it last traded at that level in September 2018. The dollar also fell against many other currencies including the Swiss franc, the pound sterling, the Japanese yen and the Australian and New Zealand dollars.  The American currency is being affected by the progression of the COVID-19 epidemic in the United States. New claims for unemployment benefits increased again during the week of July 18, jumping by 109,000 to 1,416,000 (up from 1,307,000 claims the week before). The uptick makes sense, given that several American states have once again gone on lockdown. In fact, one would expect unemployment benefit claims to increase further in the coming weeks, at the risk of damaging the economic recovery and household consumption. The White House and the Republican Party have proposed a new $1 trillion plan to counter the effects of the epidemic. The plan will include, among other things, $100 billion for education as well as a monthly $1,200 cheque for each American. The proposal is now under discussion in Congress, where the Democrats consider it completely insufficient and proposes instead a $3 trillion package. The country has already spent nearly $2.5 trillion to mitigate the financial impact of the crisis.

Another factor weighing on the US currency is relations with China that have deteriorated sharply in recent weeks. US diplomatic staff left the Chengdu consulate after Chinese authorities ordered their deportation in retaliation for the US decision to close the Chinese consulate in Houston. Tensions also remain high between the US and China on Hong Kong and Huawei. Still, the most important event taking place in the next few hours is the Fed’s monetary policy meeting, which ends this evening. Before the blackout period, which precedes all Fed meetings and prohibits its directors from speaking publicly, the directors appeared to be very concerned. The Fed is unlikely to announce new measures tonight, but it could already set the stage for new measures in case the Democrats and Republicans fail to agree quickly on the plan to help the economy.

In Europe, negotiator Michel Barnier said on Thursday that a post-Brexit trade deal between the EU-27 and the United Kingdom was looking ‘unlikely’, echoing the statements of his (also) very pessimistic British counterpart. At the end of this new round of negotiations held in London, Mr Barnier highlighted that ‘no progress’ had been made on two essential topics: ensuring a ‘level playing field’ for UK and EU businesses, and access to British fishing waters. If the European Union and the United Kingdom cannot strike a deal, the rules of the World Trade Organization, including their high tariffs, will apply to trade relations as from January 2021.

In Russia, the Central Bank reduced its key rate by 0.25% to an all-time low of 4.25%. This decision comes shortly after the World Bank announced that Russian GDP will fall by 6%. This is the fourth rate cut in 2020, which had started with a rate of 6.25%. Governor Elvira Nabiulina has hinted that more may follow. ‘We believe that there is still potential because a lot of uncertainties remain. GDP fell between 9% and 10% in the first quarter and will probably not be able to fully recover before the end of the year’, she declared.

Gold hit a high yesterday morning at $1,981.20 an ounce before quickly losing nearly $50 after profit taking. Silver, whose upward progression in recent days had been even faster, hit $26.20 an ounce yesterday, an increase of more than 15% since Monday morning, before also suffering from profit taking. Although the yellow metal broke a new historical record, silver is still far from the highs of $49.45 in 1980 and $49.80 in 2011. One of the beneficiaries of this outbreak should be the Swiss National Bank which held a 1,040-tonne stock of gold at the beginning of March. The issuing institution will publish its semi-annual results on Friday.