Dollar advances, in line with stocks, after US data; euro falls

The dollar rose for a third session against most major currencies on Tuesday, in line with U.S. stocks, bolstered by the prospect of reopenings in some American states and countries around the world, as well as U.S. services data that was stronger than market expectations.

Some analysts said since the onset of the coronavirus pandemic in March, the dollar has developed a positive correlation with U.S. stocks. Typically, the dollar tends to rally when stocks are down and financial markets are under stress.

The dollar is still a safe haven and gains when there is chaos in the market. But when it moves in tandem with risk assets, analysts are no longer surprised.

“There has been a disconnect between equities and economics,” said Mazen Issa, senior FX strategist at TD Securities in New York. “So even though there is a risk rally today, the dollar’s performance, in large part, is tied to relative equity performance.”

U.S. stocks gained on Tuesday, as did crude futures, which advanced 20%, with Brent up around 12% as production fell and countries around the globe, including Italy, Finland and several U.S. states, eased lockdown restrictions.

“This is the situation we’re in right now,” said Issa. “With very low yields, investment alternatives are few and far between and so what it does mean is that the U.S equity market, much like the dollar, is more defensively structured in terms of its sectoral compositions,” Issa said.

The greenback’s gains came at the expense of the euro, which weakened broadly after a German constitutional court ruled that the Bundesbank must stop buying government bonds if the European Central Bank cannot prove those purchases are needed.

The decision did not apply to the ECB’s latest pandemic-fighting program, a 750 billion-euro scheme to prop up the economy, but the ruling unsettled financial markets, which had been calmed by aggressive ECB asset purchases aimed at preventing the pandemic leading to an economic meltdown.

The dollar, meanwhile, edged higher after data showed a better-than-expected reading for the U.S. services sector in April. The U.S. Institute for Supply Management’s non-manufacturing index fell to 41.8 last month, from 52.5 in March, but the April level was higher than the consensus forecast of 36.8.

In afternoon trading, the dollar index was up 0.2% at 99.714.

The euro, meanwhile, fell 0.5% to $1.0850 in the wake of the German court ruling.

The dollar gained 0.7% versus the Swiss franc, another safe-haven currency, to 0.9721 franc, but slipped 0.3% against the yen to 106.450 yen.

Commodity currencies rose with higher risk appetite, with the Australian dollar up 0.6% at 64.57 U.S. cents. It also rose after the Reserve Bank of Australia left its targets for the cash rate and three-year government bond yields unchanged at 0.25%.

Trading was light because of public holidays in Japan and China. The yuan rose 0.2% to 7.1170 per dollar in offshore trade, recovering from a six-week low of 7.1560 hit in the previous session but well below its range last month.