Dollar Slides as California Lockdown Sparks U.S. Recession Fears

The U.S. dollar slumped from a record high after a statewide stay-in-place order in California ignited worries that other states may follow suit and push the world’s largest economy into recession.

The Bloomberg Dollar Spot Index slipped as much as 0.9% as the greenback weakened against every major currency. California Governor Gavin Newsom’s step marks the most stringent U.S. effort yet to curb the spread of the virus. Without action, an estimated 56% of people in the most populous U.S. state would be infected, he predicted.

“The dollar is getting sold partly on concern that if California and some other big states follow, unemployment would rise dramatically and push the U.S. into some place between a recession and a depression,” said Mark Grant, chief global strategist at B. Riley FBR Inc. “It’s a knee jerk reaction of people thinking ‘gee, we didn’t think the U.S. could get into this kind of trouble — but perhaps they can’.”

The dollar gauge had rallied about 8% over the last eight sessions, gaining in each one of them, as demand for the world’s reserve currency jumped in anticipation of a prolonged coronavirus pandemic.

“The economic damage of the coronavirus is going to be potentially greater than the medical damage to the United States,” said Tony Farren, a managing director at broker-dealer Mischler Financial Group in Stamford, Connecticut.

Unemployment Concerns

The dollar weakened as Treasury futures tickedhigher in Asia following a New York Times report that the Trump administration is asking state labor officials to hold off on releasing precise figures for unemployment filings until the federal government issues national totals. Cash trading in Treasuries is shut in the region because of a holiday in Japan.

The NYT report added to speculation of a sharp increase in U.S. unemployment benefits, which may weigh further on the dollar.

Goldman Sachs Group Inc.estimates such claims are poised to surge to a record 2.25 million this week, according to an analysis of preliminary reports across 30 states. That is more than triple the prior peak of 695,000 in 1982.

South Korea’s won and the Australian dollar both rallied close to 3% on Friday to be the biggest beneficiaries of the greenback’s decline. The pound jumped as much as 1.5%.

“The softer USD tone is giving some respite to many badly beaten-up currencies,” said Mitul Kotecha, senior emerging-markets strategist at TD Securities in Singapore. However, “it’s early days to say this is a more pronounced USD reversal,” he said, adding that demand for the dollar remains high.

— With assistance by Michael G Wilson, and Chester Yung

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