Money & Banking

Dollar sinks to its lowest level since May 2018

Bloomberg August 19 | Updated on August 19, 2020

The US Presidential elections in November is also adding to the air of uncertainty   -  Getty Images/iStockphoto

Worries over US recovery from the pandemic

The dollar sank to its lowest level since May 2018 on concern that the world’s biggest economy will struggle to regain momentum amid a standoff over further virus relief and as infections continue to mount.

The Bloomberg Dollar Spot Index fell as much as 0.6 per cent on Tuesday, dropping for a fifth straight session and bringing its 2020 decline around 1.7 per cent. On the day, the greenback is tumbling against most of its major peers, led by the pound and the euro. The shared currency climbed to a two-year high, extending its advance since last month’s landmark European Union stimulus package brightened the regions prospects relative to the US.

Recovery woes

The greenback has been on the defensive since mid-year, with US lawmakers unable to agree on measures to support the economy’s recovery from the pandemic, and with US real yields dropping to multi-year lows. On top of all that, investors’ attention is turning to the November presidential election and the uncertainty that may bring.

“Broader positioning against the dollar is not overly stretched,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. “Investors and speculators are only just starting to embrace the short dollar story. There is room for this move to run.”

Wagers on dollar losses by hedge funds and other large speculators have been building, but have yet to reach the levels seen in 2017 and 2018, according to Commodity Futures Trading Commission data.

The dollar failed to gain much traction Tuesday even after a report showed US housing starts surged in July amid record-low interest rates. The resilience in that corner of the economy comes as roughly 15 million Americans remain out of work in the virus’s wake.

With some investors still sceptical about the durability of the recovery and the Federal Reserve buying billions of dollars of Treasuries to support markets, benchmark US yields remain not far above record lows.

The 10-year US real yield, which is the rate after stripping out inflation, is now only about 30 basis points above its German counterpart. That is the smallest spread since 2014.

“Momentum is on the bears’ side now, and until the US can get the virus under better control, I think the dollar remains under pressure,” said Win Thin, chief currency strategist at Brown Brothers Harriman.

Published on August 19, 2020

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