Currencies

Dollar drops after Fed unveils unprecedented measures to lend, backstop debt

U.S. dollar banknotes.
Liu Jie | Xinhua via Getty

The dollar dropped on Monday after the U.S. Federal Reserve took unprecedented steps to backstop a range of debt in an attempt to offset the "severe disruptions" to the economy caused by the coronavirus outbreak.

The steps include establishment of new programs that will lend against student loans, credit card loans, and U.S. government backed-loans to small businesses, as well as new programs to buy bonds of larger employers and make loans to them.

Existing purchases of U.S. Treasury and mortgage-backed securities will be expanded as much as needed "to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy."

"There's no doubting that the Fed is doing everything within its power to see the economy through this period of unbelievable turmoil," said Craig Erlam, senior market analyst at OANDA Europe.

Investors are now waiting on the U.S. government to pass stimulus to support the economy.

"I think the one thing we really need to see is more fiscal ammunition coming to the fore," said Mazen Issa, senior currency strategist at TD Securities in New York. "You've got to think about those that are asked to be socially distant and stay home from work and not earn a paycheck and they're taking their time to make them whole. They need to speed it up."

Senate Democrats objected to a $1 trillion-plus stimulus bill on Sunday as being overly weighted toward corporate interests at the expense of healthcare workers, hospitals and state and local governments.

The dollar index against a basket of peers was last 102.35, down 0.5% on the day.

The dollar had gained earlier before the Fed action as stocks plunged, raising concerns that the multiple central bank actions so far to ease liquidity across markets have not been effective.

The euro was last up 0.98% against the greenback at $1.0799.

The U.S. currency's earlier rise was also fuelled by a turnaround in dollar positions among hedge funds to a net short from an overall long bet, according to latest positioning data. That raised speculation that the dollar's rally could be partly explained by short-covering by traders.