Forex

Dollar struggles amid China-US tensions, coronavirus woes

Reuters SINGAPORE | Updated on July 27, 2020 Published on July 27, 2020

Euro storms toward $1.17 and Yen firm amid doubts over U.S. recovery

The dollar began the week under pressure from all corners as intensifying Sino-U.S. tensions added to worries that the coronavirus resurgence in the 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. labour 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 despite a rise in local coronavirus cases, climbing to $0.7120. The New Zealand dollar rose 0.3% to $0.6657.

Both, however, remained 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.

The 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 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.

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Published on July 27, 2020
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