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Dollar Slides, Hits 22-Month Low

The dollar was in retreat in early European forex trading on Friday. Doubts about the strength of the U.S. economic recovery weighed on the greenback. The U.S. government struggled to curb the number of coronavirus cases in the country.

At 3:10 AM ET (0710 GMT), the Dollar Index was down by 0.1% at 94.627. It was breaching the March low of 94.650 to reach levels not seen since late 2018. The currency was on track for its worst week in a month.

USD/JPY was down by 0.5% at 106.33 and GBP/USD was down by 0.1% at 1.2725. Moreover, EUR/USD was up by 0.1% at 1.1610, having reached its highest point since late 2018.

The euro was higher across the board, profiting from an apparent ‘safe haven’ bid in forex exchange. This came after the creation of a 750 billion-euro recovery fund that improved the short-term political risk outlook.

The U.S. reported its first rise in unemployment claims since March on Thursday. That was with 1.416 million Americans filing for unemployment claims over the last week. This was due to some states rolling back reopenings because of the Covid-19 pandemic.

There appears to be no sign that COVID-19 is stopping its relentless march across the U.S. It surpassed the 4 million officially recorded Covid-19 cases on Thursday. A quarter of them have come in just the last 15 days.

Furthermore, the next U.S. fiscal rescue package appears to be in a deadlock in Congress. A month-end deadline has appeared as some unemployment benefits are due to expire.

Stuart Simmons, senior portfolio manager at QIC, said U.S. exceptionalism has eroded, perhaps with only one pillar still standing. This is the demand for big-cap U.S. stocks.

The U.S. no longer has a yield advantage, said Simmons. There is no growth advantage with the recovery from coronavirus likely to prove more challenging than other developed markets.

The Dollar: U.S. and China Friction & Trade Relations

In forex, the continued friction between the U.S. and China helped limit the damage in the dollar on Friday. It also helped boost the Japanese yen as a safe yen.

China has ordered the United States to close its consulate in the city of Chengdu on Friday. This was in response to a U.S. demand this week that China closes its Houston consulate.

Analysts at ING said this situation has been a catalyst for a pause in the risk-on rally. But to start seeing a reversal, they would likely need to see a further escalation. Most of all, they need to see evidence that trade relations will be impacted.

Meanwhile, the Central Bank of Russia is due to meet and is expected to cut its key interest rate again. It has been on hold for the past couple of months. In the FX market, the ruble was a shade lower against the dollar at 71.56.

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