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Dollar Down, Survey Boosts Risk Appetite 

The dollar weakened in early European forex trading on Thursday. Signs of a recovery in Europe boost sentiment despite heightened tensions between the U.S. and China.

At 3:10 AM ET (0710 GMT), the Dollar Index fell by 0.1% to 94.808. It was just off the four-month low of 94.773 from earlier.

Elsewhere, USD/JPY was largely flat at 107.09 and GBP/USD was flat at 1.2731. EUR/USD rose 0.2% at 1.1587, having reached 1.1593, a 21-month high.

Germany’s Gfk consumer confidence survey has helped the euro and general risk-taking sentiment. It was coming in better than expected earlier Thursday, suggesting that Europe’s largest economy is on the path to recovery.

The positive-looking consumer sentiment index rose to -0.3 in August. Better than the -5 expected and the -9.6 seen in July, it gained almost 23 points since May. Its low in May was -23.1 points.

This comes in the wake of the European Union leaders agreeing on a substantial stimulus plan. This plan should help the region rebuild from the damage caused by the Covid-19 pandemic.

The Dollar: Investors may Turn Defensive

However, there are dangers to the risk-on tone.

Tensions are escalating between the two largest economies in the world affecting the FX markets. The U.S. ordered China to close its consulate in Houston over accusations of spying.

Analysts at ING said investors may turn defensive on Thursday. This is because market players are awaiting possible retaliation from China.

The yuan is a barometer of Sino-U.S. relations and it now trades around the 7.0 level. It fell to a one-week low of 7.0174 per dollar in offshore trade on Tuesday.

Peoples’ attention will also be on the release of the weekly initial jobless claims data early in the U.S. session. Last week’s release suggested the improvement in the U.S. labor market since April may be petering out.

Forex news reports the USD/TRY has held relatively steady at 6.8482. This is ahead of the latest rate-setting meeting by Turkey’s central bank.

Most market players expect the bank to leave the key rate unchanged at 8.25% for a second month. But the pressure is rising on it to start lifting borrowing costs as the inflation outlook deteriorates.

According to JPMorgan Chase, with recovering domestic demand and increasing price pressures, the next move will be a hike.

They will have the first hike in the first half of 2021. But a sharper-than-expected demand recovery could lead to increased risks to price and financial stability. And this is encouraging the central bank to act earlier.

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