Image: AFP.

The US recorded 37,000 new Covid-19 cases on Thursday, the highest number since April 24.

So, why do we see no significant FX action? 

The dollar index (DXY) barely moved in Asian trading on Friday and stood at 97.3380 at 7pm HK time, virtually unchanged from the open at 97.3510. Note that by comparison the DXY had jumped to near record highs in mid-April at the height of the first wave of US infections and traded at 100.3800 on April 24 as behooves an alleged safe-haven currency.

There are two related explanations for the odd USD behavior.

First, a safe haven reserve currency can only play that role as long as the underlying fundamentals remain sound. 

Alas, they haven’t. The US Fed has massively pumped up the volume of its balance sheet from US$4 trillion in March to $7 trillion at present and – according to a former New York Fed president, US net national savings are at record lows of 1.4% of GDP and about to go negative, and there’s no end in sight to the bulging US current account deficit.

No currency carrying that load will or should retain the world’s trust.

The second issue is the state of the US economy and the performance of the US equity markets. 

The US economy has been stagnant since early June. Thursday’s initial unemployment claims came in much as in the week before, and well above expectations. The second virus wave is having a serious employment impact.

Again, that should have pushed the dollar up as it did in March and April. It did not because the dollar-negative fundamentals will continue to grow and worry investors.

It’s high time for savvy investors looking at the longer-term impact of the US coronavirus crisis, and the apparent inability of the US to cope with it, to consider the conclusion that the US dollar safe haven status is not sustainable under these circumstances.

Asian and European stocks today are not much bothered by the US virus disaster. US futures are trading sideways. The wisdom of the Street is that, no matter what, the Fed will provide and stocks will rise.

Foreign investors might begin to doubt the logic of that and watch the DXY for guidance.

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This story appeared initially on Asia Times Financial.