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Dollar fell significantly accompanied by a rise in risk appetite following government stimulus plans, while oil prices rise

26 May 2020 05:28 PM

Risk appetite has risen in financial markets today with most stocks rising around the world, as governments have decided to gradually reopen economies, improving the outlook for a return to economic growth during the second half of this year. European stock indices jumped and US stock index futures rose, while the dollar fell with traders preferring high-return investments. Japan and the UK announced new economic stimulus plans, following Germany’s recently approved stimulus plans, all of which has contributed to improved market confidence.

On Tuesday, the Bank of Japan (BOJ) offered to pump 1.7 trillion yen into the economy, as part of a plan to increase lending to companies affected by the coronavirus pandemic. Central bank data showed that the amount offered to financial institutions in the bid today was twice the size of the previous bid, indicating that the program will help direct funds to companies suffering from a lack of liquidity.

For his part, the British Minister of Finance said that the government has provided more than £32 billion in loans and grants to help companies affected by the spread of the coronavirus, which has caused huge losses threatening financial stability. As central banks and governments continue to offer economic stimulus, traders are more optimistic about seeing companies and the global economy end their worst period since the Great Depression of the 1930s in a few months.

The pound rose strongly against many currencies today, including the dollar, rising to its highest levels in nine sessions against US dollar at $1.2349, after touching $1.2173. This rise occurred after Reuters news agency said that a source from the Brexit negotiation team indicated that it would not be possible to agree with the current conditions laid out by the EU, and that further agreement delays can be expected next week.

The euro was also able to rise against the US dollar to $1.0979 after leaving $1.0890 earlier in the trading session today.

It appears that the US dollar is under significant pressure against many other foreign currencies, with the dollar being sold in order to obtain higher-yielding assets. Even the Japanese yen managed to rise slightly compared to the US dollar today, and the dollar pair against the yen fell from 107.91 to 107.39. However, the movement of the USDJPY remains limited in the range for the sixth consecutive session, as the specifications of the Japanese yen are similar to the US dollar in terms of the direction of traders in the currency with changing confidence in the financial markets.

With all this confidence in the markets, and the large rise in US stock indexes that pushed the Dow Jones futures contracts to levels above 25,000 points, gold prices fell slightly to touch lower levels at the price of $1720.00 per ounce, after giving up the gains to $1735.00 that were made at the start of the day. 

Gold is seeing downward pressure because traders are showing a preference for higher-yielding assets, and the demand for gold is decreasing. Nevertheless, gold still finds demand from those concerned about increasing political tensions between US and China, along with the fact that the global economy is experiencing its worst recession in 90 years.

Oil prices managed to rise on the wave of market optimism around the re-opening of economies.  Although the global demand for oil is still weak compared to a year ago today, the OPEC+ production cut of 9.7 million barrels, along with voluntary reductions from Saudi Arabia, Kuwait and the UAE, amounting to approximately 1.78 million barrels, have contributed to the higher re-pricing of oil.

According to Reuters news agency, the Russian Kremlin said today that the OPEC+ group will study developments in global oil markets before taking any new decisions on production policy, which gives the impression that the organisation and its allies will continue to maintain the bulk of production cuts. This news also pushed oil prices higher. US light oil prices rose in July contracts to settle above $34 touching a high of $34.78. Brent oil contracts also rose higher to $36.66.

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