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Dollar in the doldrums as focus turns to Fed, U.S. fiscal package

The dollar nursed losses on Tuesday, after slumping to a two-year low, as investors worry about the damage from the coronavirus to the U.S. economy and await the latest outlook from the Federal Reserve and the passage of a new fiscal rescue package.

The U.S. currency’s drop has put a rocket under gold prices and has the yen standing near its highest in four months, the euro just below a 22-month high and the kiwi close to its strongest since January.

While the moves were modest, they kept pressure on the greenback ahead of the two-day Federal Reserve meeting that gets underway later Tuesday as speculation mounts about a possible shift in policy emphasis — even if no policy change is expected.

“Officials at the Fed have started talking regularly about…allowing inflation to rise above target a bit before tightening,” said Capital Economics’ market economist Oliver Jones.

At the same time the euro’s rise has been unstoppable since European leaders struck a deal for a common debt pool to fund recovery spending in the worst-hit countries.

“With all of this in mind, we would not be surprised to see the dollar fall further,” Jones said, since greater tolerance for inflation leaves room for more pressure on U.S. real yields – diminishing a key attraction of holding dollars.

The Australian dollar was last up 0.2% at $0.7160, close to a 15-month top of $0.7184 hit last week.

The yen edged ahead to 105.25 per dollar and the euro tacked on 0.1% to $1.1766. The New Zealand dollar was steady at $0.6685 and sterling inched ahead to a new four-month peak of $1.2925.

Slide away

Pressure on the greenback has been relentless since the end of May, as faith in a global economic recovery from the pandemic has grown stronger and other currencies have rallied.

But it has intensified in the wake of the EU fiscal deal, and as the coronavirus’ spread in the U.S. casts doubt on its own economic recovery.

While the rate of new U.S. case numbers is showing signs of slowing down, the unchecked spread of the virus also seems to be denting economic recovery and a rebound in hiring has stalled.

Against a basket of currencies the dollar is tracking toward its worst month in nearly a decade, shedding 3.9% in July. It has lost nearly 7% since mid May. Short dollar positions are at their highest in two years.

That has led some to entertain the prospect of an imminent dollar rebound. One warning sign has come from the Chinese yuan, which has struggled to capitalize on the dollar’s weakness amid heightened Sino-U.S. tensions.

A big U.S. fiscal package – currently deadlocked in negotiations between Democrats, who have made a $3 trillion proposal, and Republicans who have tabled a more modest $1 trillion plan – could also boost the dollar.

As could the Fed, if it does not sound so dovish or if markets “sell the fact” after the meeting.

“Investors have already priced in significant Fed easing for a long time, so we are not sure where the dovish surprise will come from,” said Steve Englander, head of global G10 FX research at Standard Chartered in New York.

“Over the last eight years, core (inflation) has hit 2% only six out of 96 months and has been above 2.1% only once,” he said.

Dollar struggles amid Sino-U.S. tensions, coronavirus woes

The dollar began the week under pressure from all corners as intensifying Sino-U.S. tensions added to worries that the coronavirus resurgence in United States could undermine the recovery in the world’s biggest economy.

In morning trade it fell to a four-month low against the yen and a new 22-month trough on the euro at $1.1699.

The Antipodean currencies also rose a little and against a basket of currencies the dollar was at its lowest since September 2018.

The lack of support for the greenback, even as tit-for-tat consular closures marked the latest escalation in U.S.-China tensions, is a shift for the dollar which has been closely tracking global sentiment through the coronavirus crisis.

It also comes with a broad re-evaluation of the euro’s value after a landmark European agreement on a fiscal rescue package just as cracks start to emerge in the U.S. labor market rebound.

“The common factor is the ongoing decline in U.S. yields,” said Ray Attrill, head of FX strategy at National Australia Bank in Sydney. They have fallen as the bond market prices a slow U.S. recovery, robbing the dollar of a dependable attraction.

“The message from the end of last week is that deterioration in risk sentiment alone may not be enough to provide the dollar with any kind of meaningful, durable support,” Attrill said.

“I suspect it’s going to take much more (deterioration in sentiment) to really bring the dollar’s reserve-currency safe-haven characteristics back to the fore.”

The Australian dollar took advantage and edged ahead in spite of a rise in local coronavirus cases, climbing to $0.7120. The New Zealand dollar rose 0.3% to $0.6657.

Both, however, remain below recent peaks and were under pressure against the yen as the broader mood remained grim in the shadow of rising infections and simmering geopolitical tensions.

Staff of the U.S. consulate in Chengdu were making final efforts to clear out ahead of a Monday deadline to shut the outpost in response to the U.S. ordering China’s Houston consulate to close amid allegations of spying.

Elsewhere, investors are also beginning to fret about U.S. political deadlock over the next round of fiscal stimulus with a month-end deadline looming to extend some unemployment benefits.

The White House and Senate Republicans reached an agreement on the way forward over the weekend but it remains to be seen whether it will be acceptable to Democrats in the House.

Last week a recovery in the U.S. job market unexpectedly stalled, while purchasing manager surveys showed Europe’s recovery pulling ahead – adding to nerves about any letup in U.S. stimulus.

“Watch the Swiss franc and Japanese yen as two hedges against no political resolution,” said Chris Weston, head of research at Melbourne brokerage Pepperstone.

“Dollar/yen has found good support into 106, but a break here and I am holding shorts for 104.50. I like selling strength in both pairs.”

The franc rose to a four-month high of 0.9186 per dollar on Monday and is testing resistance at 0.9183. The yen, after moving sideways for two months, rose 0.4% to 105.65, its highest since mid-March.

Yen up and dollar clinging on as China’s Houston response awaited

The safe-haven yen advanced to a one-month high on Friday as deteriorating Sino-U.S. relations heightened investor anxiety, while a surging euro put the beleaguered dollar on track for its worst week in a month.

China has said it “must” retaliate after the U.S. ordered its Houston consulate to shut this week, amid allegations of spying. The editor of China’s Global Times said on Twitter that Beijing will announce countermeasures on Friday and ask one U.S. consulate to close.

Earlier on Thursday U.S. Secretary of State Mike Pompeo said Washington and its allies must use “more creative and assertive ways” to press the Chinese Communist Party to change its ways, calling it the “mission of our time.”

While trading volumes were lightened by a public holiday in Japan, the palpable tensions were enough to rouse the yen from a range it has kept for weeks.

The yen rose 0.3% to 106.51, its strongest since late June. The Australian and New Zealand dollars were also off from multi-month highs and the Chinese yuan struggled for headway.

“The general concern is that any escalation in U.S-China tensions is bad and is putting the trade deal at risk,” said Kim Mundy, an FX analyst at the Commonwealth Bank of Australia in Sydney.

“If we see China retaliating today, our view is that Aussie and the other growth-linked commodity currencies can fall,” she said, with a dip likely to shove the Aussie back in the 68 cent to 70 cent range it held for several weeks.

The Australian dollar drifted higher to $0.7112, and is up about 1.7% for the week, but roughly 1% below a 15-month high touched on Wednesday.

The New Zealand dollar was at $0.6641, just under a 7-month high of $0.6690 touched on Thursday.

The safe-haven Swiss franc also hit a four-month peak of 0.9243 per dollar. Weaker-than-expected U.S. employment data had rattled U.S. markets overnight.

Farewell, Chengdu?

Sino-U.S. ties have deteriorated over issues ranging from the novel coronavirus pandemic, which began in China, to Beijing trade and business practices, its territorial claims in the South China Sea and its clampdown on Hong Kong.

A tit-for-tat consulate closure is shaping as among the most likely Chinese reply to the Houston consulate eviction. A source told Reuters on Wednesday that China was considering shutting the U.S. consulate in Wuhan.

The Chinese yuan, a barometer of Sino-U.S. relations, fell overnight after the South China Morning Post reported that the U.S. consulate in Chengdu may be shuttered.

The yuan last sat at 7.0058 per dollar. Other Asian currencies from the South Korean won to the Thai baht and Singapore dollar were also gently pressured.

Elsewhere the tearaway euro remained a tower of strength since busting through chart resistance in the afterglow of Europe’s leaders agreeing on a coronavirus rescue package.

It has gained 1.6% this week, its best since late June, and 3.4% for the month so far to sit at $1.1615, just below a 21-month high hit overnight.

Sterling hung on to early-week gains at $1.2749.

Besides China’s next move, investors are looking to a slew of Purchasing Managers Index figures due across Europe and the U.S. later on Friday for a read on economic recovery progress.

Focus is also on the next U.S. fiscal rescue package, which is deadlocked in Congress while a month-end deadline looms as some unemployment benefits are due to expire.

“The concern is that a failure to get this away will impact consumer sentiment at a time when U.S. data is starting to miss the mark,” said Chris Weston, head of research at Melbourne brokerage Pepperstone.

Dollar slows slide as U.S.-China tensions escalate

The dollar crept off milestone lows against other majors on Thursday, and held on to gains against the yuan, as heightened Sino-U.S. tensions kept currency markets cautious.

The United States gave China until Friday to close its consulate in Houston amid accusations of spying, and President Donald Trump said it was “always possible” other Chinese missions could be ordered to close as well.

China has vowed to respond, and the escalation in tension between the world’s two largest economies sent the yuan on its sharpest slide in nearly two months on Wednesday and helped the greenback find support in Asia on Thursday.

The euro sat at $1.1580, about 0.2% below a 21-month high of $1.1601, which it hit overnight in the wake of Europe’s leaders agreeing on a coronavirus rescue package.

The Australian dollar pulled back from a 15-month peak and drifted around $0.7151, while the kiwi was a touch below Wednesday’s six-month top at $0.6678.

Moves were slight and volumes were lightened by a public holiday in Japan.

“The market is still trying to ascertain whether this increase in geopolitical tension is going to be enough to derail the positive vibes we’ve been seeing,” said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.

“Recent history will tell you that the market will tend to digest this stuff and carry on in its merry way…but a bit of caution is warranted, and the yuan moving higher is probably the canary in the coalmine that we need to keep an eye on.”

The yuan is a barometer of Sino-U.S. relations and it recovered a little from a one-week low, but kept to the weak side of the 7-per-dollar mark at 7.0030 in offshore trade.

Deal Watch

However, dollar gains were limited with the greenback barely lifting from a four-month low against a basket of currencies, sitting at 94.931. July so far is its worst month against the euro since January 2018 and that weakness is fanning out across the board.

Caution and dollar softness helped the safe-haven Swiss franc to a four-month top of 0.9281 per dollar, but the yen was rangebound at 107.13 per dollar.

U.S.-China ties have worsened sharply this year over issues ranging from the coronavirus and telecoms-gear maker Huawei, to China’s territorial claims in the South China Sea and clampdown on Hong Kong.

The U.S. State Department said the Chinese mission in Houston was being closed “to protect American intellectual property and Americans’ private information.”

Chinese state media said on Thursday that the move was a political ploy ahead of November presidential elections, and one source with knowledge of the matter told Reuters that China was considering closing the U.S. consulate in Wuhan in response.

Citi analysts expect some kind of Chinese reply, but they do not think it will derail the trade deal – which is the main focus for markets – and advise betting yuan rises.

“We think the Phase One trade deal is likely to hold into the U.S. election and the market may shift attention to China’s relative economic outperformance,” said Johanna Chua, a Citi strategist in Hong Kong, in a note.

Other threats to the global coronavirus recovery are also growing.

South Korea slipped into its first recession since 2003 as the country’s exports fell by the most since 1963, showing Asia’s fourth-largest economy has a considerable road back to recovery.

Another day with more than 1,100 U.S. coronavirus fatalities also underscored the growing risk to recovery there. Weekly jobless claims due at 1230 GMT will offer the next checkup on economic progress.

Euro dips from 4-month high vs dollar, but outlook well-supported

The euro slipped against the dollar on Monday, as investors booked profits on earlier gains that took it to a more than four-month high on hopes the European Union would agree on a recovery fund for economies in the region hit by the COVID-19 pandemic.

The fund is expected to be around 750 billion euros ($857.93 billion), of which 390 billion euros could be offered as grants.

EU leaders have made progress in Brussels after three days of talks, but they remain at odds over the composition of the recovery fund. The fund’s backers initially proposed 500 billion euros of grants and 250 billion of loans.

Some countries objected to that much in grants. They saw 350 billion euros as the maximum, but showed signs of compromising.

“We can see some profit-taking in the euro,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. “But I can still see it as well-supported on weakness as this deal is good for the European economy.” The euro hit a high of $1.1467 and was last down 0.1% at $1.1412.

Analysts said the smaller the amount of grants, the more the euro would fall.

The EU summit was originally due to last two days. The fact that it is now continuing into a fourth day of negotiations is evidence that EU leaders are ready to do everything it takes to maintain unity in the euro zone, said Jane Foley, senior currency strategist at Rabobank in London If they agree on a recovery fund, that would boost confidence in the euro regardless of the numbers in the deal, said Mike Bell, global market strategist at J.P. Morgan Asset Management.

Elsewhere, the U.S. dollar index rose 0.1% to 96.002, recovering from a six-week low hit earlier in the session. Its gains, though, remain capped by expectations of more stimulus from Europe and from the United States.

That said, the U.S. Congress is bracing for a battle on the proposed stimulus bill, that could further boost safe-haven bids for the dollar.

U.S. Senate Democrats are prepared to block Republicans from moving forward on a partisan coronavirus aid bill, the chamber’s top Democrat warned on Monday, as Republican leaders were expected to meet at the White House to discuss legislation.

The dollar rose 0.1% versus the yen to 107.14, and was up 0.1% as well against the Swiss franc to 0.9393 franc.

Euro in ‘wait and see’ mode ahead of crucial EU summit

The euro was flat against the dollar on Friday before a European Union summit that will try to reach agreement on a 750 billion-euro recovery fund.

No outcome is expected at the summit until evening, at best, but either an agreement or a collapse in the talks will have a major impact on the currency when trading resumes.

The euro, which retreated from four-month highs reached earlier this week, held steady at $1.1389. It was higher against the British pound at 90.72 pence.

“A positive outcome should see the single currency retest the week’s highs at $1.1450”, wrote Jeffrey Halley, an analyst at Oanda, noting an unfavourable outcome might send the euro as as low as $1.13.

Implications for the euro should the EU go ahead with its plan would also be long-lasting, Marshall Gittler, head of investment research at BDSwiss, told his clients.

A deal “would make the euro more attractive as a reserve currency” by “establishing a central fiscal capacity that can respond to adverse shocks, which would make monetary union more stable”, he said.

Many traders expect that the summit will reach no agreement and EU leaders will need to meet again to find a compromise.

For the week, the dollar was on course for gains against the yen, sterling, and the Swiss franc. The yuan fell by the most in three weeks, undone by a steady increase in diplomatic frictions between the United States and China.

Some investors say they are beginning to see signs that a surge in coronavirus infections is threatening the U.S. economy. Others point to deteriorating U.S.-China ties as a reason to avoid riskier trades, which should keep the dollar in demand for now.

The dollar stood at 107.13 yen and sterling was little changed at $1.2541. The dollar was quoted at 0.9451 Swiss franc, close to its highest since July 3.

Another jump in coronavirus infections has forced California and other U.S. states to at least partly shut down again. In addition, President Donald Trump’s administration is considering banning travel to the United States by all members of the Chinese Communist Party.

The yuan fell by the most since June 24 to 6.9982 to the dollar.

Dollar climbs as traders focus on weak Chinese retail sales

The U.S. dollar strengthened on Thursday as investors focused on poor Chinese retail sales instead of its stronger than expected economic growth last quarter, with the focus now shifting more to a European Union summit this weekend.

The European Central Bank meeting later in the day will most likely be overshadowed by the summit, at which European countries are expected to vote on a 750 billion euro recovery fund proposed by the European Commission to revive euro area growth.

The euro was last trading down 0.1% at $1.1401, though against the safe-haven Japanese yen, the dollar was trading neutral at 106.95.

The biggest mover was the British pound as it remained strongly correlated to risky assets, falling last by 0.3% to $1.2548.

Surging U.S. virus cases dampened sentiment and weighed on equity markets, which in turn injected some strength in the U.S. dollar, a proxy for global risk sentiment.

“No one really wants to buy a lot more (equities) here because they’re concerned about a second wave of COVID, they’re concerned about the pace of corporate earnings deterioration,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets.

“But equally, they don’t want to be massively short either because they know the central banks are active, and I think that’s probably one of the reasons why we’re doing this back and forth,” he added.

Simmering Sino-U.S. tensions also added to broadbased dollar strength.

U.S. President Donald Trump has not ruled out additional sanctions on top Chinese officials over Beijing’s crackdown on Hong Kong, a White House spokesman said on Tuesday.

The New York Times also reported his administration is considering a sweeping ban on travel to the United States by Chinese Communist Party members, citing four unnamed people with knowledge of such discussions.

China’s 3.2% economic growth last quarter easily beat market expectations for 2.5%. But an unexpected drop in retail sales – for a fifth straight month – was an unwelcome harbinger of possible problems ahead for the rest of the world as more countries relax lockdowns and allow businesses to reopen.

“The retail sales printing weak is showing that China doesn’t have much of a private consumption engine,” Gallo said.

The growth-sensitive Australian dollar slipped under 70 cents after the data and was last down 0.2% at 69.92 versus the greenback.

Elsewhere, the Norwegian crown fell by 0.6% both against the dollar and the euro to 9.3290 and 10.6345 respectively.

Dollar falls on rising euro, higher US stocks

The dollar fell in North American trade on Tuesday as the euro rose on optimism about the possibility of a European Union stimulus package and as U.S. stocks gained.

The U.S. dollar index, which measures the safe-haven greenback against a basket of six rival currencies, was down 0.31% to 96.265. The weaker dollar was partly attributable to a move higher in the euro on hopes the European Union will agree on a rescue financing package that will limit the economic damage to the bloc from the coronavirus pandemic. The euro was up 0.47% at $1.139.

The European Union’s approval of its recovery fund may see the euro test $1.150 with a break leading to a test of crucial resistance levels around $1.180.

“Market consensus has shifted towards the euro on the assumption that euro area will suffer less economic damage and that a large rescue package will be approved,” said Karl Schamotta, chief market strategist at Cambridge Global Payments.

“History would suggest that market participants shouldn’t get their hopes too high around a rescue package. Ultimately it is likely to be smaller and more diluted than what is on the table right now.”

The S&P 500 index was higher on Tuesday morning, despite having started off the day in the red. U.S. stock indexes initially fell after three banks – JPMorgan, Wells Fargo and Citigroup – reported mixed earnings.

“The correlation between equities and foreign exchange have strengthened substantially in the last month,” said Schamotta.

“Market consensus is shifting against the dollar and it does look as if traders are looking for any opportunity to sell dollars and pick up currencies with greater appreciation potential.”

But although Refinitiv data suggests second-quarter results will show the second-biggest quarterly drop in corporate earnings since 1968, investors maintain some degree of confidence in the U.S. consumer.

U.S. consumer prices rebounded by the most in nearly eight years in June, according to consumer price index data from the Labor Department released Tuesday, but a resurgence in new COVID-19 cases after the reopening of businesses suggests a moderation in demand that could keep inflation muted and allow the Federal Reserve to keep injecting money into the ailing economy.

Dollar falls as US earning season kicks off

The U.S. dollar edged lower on Monday as investors looked to domestic corporate earnings and upcoming retail data to gauge whether guarded optimism on the country’s economic outlook is justified.

The index that measures the dollar against a basket of six other major currencies – which often serves as a safe-haven for investors seeking high-quality assets in moments of market volatility – was down 0.31% in North American morning trade. The dollar ended its third week of losses on Friday as investors bought into risk-sensitive currencies on bets that the worst of the pandemic’s sweeping impact was over.

The S&P 500 index was up 0.90% on Monday morning and the Dow was up 1.15% as second-quarter earnings kicked off with PepsiCo Inc beating analysts’ estimates. Wall Street banks JPMorgan, Citigroup and Wells Fargo are set to report on Tuesday.

While Refinitiv data suggests second-quarter results will show the second-biggest quarterly drop in corporate earnings since 1968, investors maintain some degree of confidence in the U.S. consumer.

Consumer price index data on Tuesday, retail sales data on Thursday and consumer sentiment data Friday are expected to offer insight into how Americans are spending.

“America’s economy-driving consumer will be in the spotlight, one that it will share with a slew of key events like central bank meetings in Canada and Europe. Just how far down the road to recovery the world’s major economies have traveled will be gleaned from top-tier data. The week’s main sights are on U.S. indicators Thursday on retail spending and weekly jobless claims,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.

U.S. coronavirus cases surged over the weekend, as Florida reported an increase of more than 15,000 new cases in 24 hours, a record for any state, surpassing a peak hit in New York in April.

The euro rose 0.63% to $1.137, maintaining its uptrend since late last month and was on track for its best day since June 22.

Looming large for the single currency this week is a European Union summit on July 17-18, at which leaders need to bridge gaps on a long-term budget. Investors will also watch for whether an agreement on a proposed 750 billion-euro recovery fund for the bloc emerges.

Dollar climbs from four-week low as US stocks decline

The dollar rallied from a four-week low on Thursday, as weaker U.S. stocks enhanced the currency’s safe-haven appeal for investors following a surge in new coronavirus cases and a U.S. Supreme Court ruling on President Donald Trump’s financial records.

The euro fell from a one-month high versus the dollar, while commodity currencies, which tend to rise when risk appetite increases, also slid against the greenback.

The dollar rally coincided with the Supreme Court ruling on Thursday that a New York prosecutor can obtain Trump’s financial records. But it did prevent, at least for now, the Democratic-led House of Representatives from obtaining the same records.

“The dollar over the last few weeks has been trading on risk-taking levels and taken on its role as a safe haven,” said Ronald Simpson, managing director, global currency analysis at Action Economics in Florida.

“The Supreme Court ruling had a big impact on everything: the dollar rose, (Treasury) yields fell, and stocks got slammed. It puts some risk on Trump right now that something bad may come out,” he added.

Earlier in the global session, the dollar struggled, with the Chinese yuan climbing to a four-month peak, as investors increased positions in Chinese stocks on growing signs of a recovery in the world’s second-largest economy.

Market sentiment turned, however, during the U.S. session. Another contributing factor, apart from the Supreme Court decision, was the renewed surge in COVID cases. More than 60,000 new COVID-19 infections were reported on Wednesday and U.S. deaths rose by more than 900 for the second straight day, the most since early June.

U.S. stocks fell on Thursday, a day after hitting a record closing high. The dollar continues to move in opposition to stocks and risk appetite.

Analysts believed though that despite losses, stocks should remain well-supported on dips.

“The risk backdrop should remain more or less positive for the foreseeable future, given the global fiscal and monetary policy setting,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

In early afternoon trading, the dollar index rose 0.3% to 96.741, after falling to a four-week low of 96.233.

The euro dropped 0.3% to $1.1291, not that far from a one-month high around $1.1371 hit earlier in the day even after German export data failed to meet analysts’ expectations.

The Chinese yuan soared to a four-month high of 6.9808 in the offshore market and was last little changed against the dollar at 6.9950.

The dollar was flat against the yen at 107.25 yen and was up 0.3% versus the Swiss franc at 0.9402 franc.