The Dollar weakens; other losses are likely

By Peter Nurse

The dollar weakened at the beginning of the european session on Tuesday, while political quarrels on a rescue plan to us and the grim economic outlook have kept the investors away from the currency.

A 10: 40 am, the u.s. dollar index, which tracks the greenback against a basket of six other currencies, fell 0.1% to 93,442.

The USD/JPY has risen 0.1% to 106,05, the GBP/USD rose 0.1% to 1,3078, while the EUR/USD rose 0.1% to 1,1775.

After his worst month of July in ten years, the dollar has posted gains on Monday, helped by data on manufacturing better than expected, but this positive tone was of short duration.

The inability of us lawmakers to agree on a new draft law to combat the coronavirus weighs heavily on the balance, thereby undermining the optimism for a prolonged recovery. This is in contrast with the recent agreement in Europe on the proposal for a stimulus funds of 750 billion euros.

The tightening of government bond yields between the EU and the United States comes in addition to the difficulties linked to the dollar.

“The roots of the cycle of depreciation of the dollar currently reside in the sharp compression in yield spreads that were previously the dollar … On this basis alone, there should be many more to come due to the weakness of the dollar”, said analysts from the National Australia Bank in a research note, according to Reuters.

That said, the dollar is not only losing ground relative to the currencies perceived as riskier.

The yen and the swiss franc also advanced versus the greenback in terms of positioning, said analysts at ING (AS:INGA) in a research note. “This can be read as further evidence that investors are less and less of interest to buy the dollar as a safe haven relative to other assets with low yields”.

“This seems to be largely a function of the risks of idiosyncratic growing that the dollar is facing on the domestic front, since the aggravation of the contagion of the crisis Covid-19 continues to delay plans to reopening the most States in the us; if there is, this suggests that more restrictions are the order of the day. It also casts new doubts on the prospect of a rapid economic rebound,” added ING.


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