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Dollar Edges Higher, But More Weakness Likely

·2 min read

By Peter Nurse

Investing.com -- The dollar has posted small gains in early European trade Monday, but the general trend remains one of greenback weakness amid mounting concerns about a slowing U.S. economic recovery from the coronavirus pandemic.

At 3:05 AM ET (0705 GMT), the US Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.3% at 93.550, rebounding from the two-year low of 92.523 seen late last week.

Elsewhere, USD/JPY was up 0.1% at 105.98, GBP/USD was down 0.1% at 1.3070, while EUR/USD was down 0.2% at 1.1755, more than a cent below Friday's two-year high of 1.1908.

While the dollar has moved higher Monday, this is widely being seen as a technical reaction to the sharp losses of late, mainly against the euro, and these gains could quickly be eroded.

“The dollar heads into August under pressure, having seen its largest monthly decline in three years,” said analysts at ING, in a research note.

“The nature of the sell-off suggests a different dynamic is at play. This is not the benign dollar decline we had envisaged, but instead, one seemingly being driven on a new risk premium being inserted into U.S. asset markets on the back of a resurgence in U.S. Covid-19 cases and perhaps as well November's presidential elections starting to make their mark,” ING added.

The U.S. has reported over 4.6 million Covid-19 cases, and is now in a new phase of the novel coronavirus outbreak with infections "extraordinarily widespread" in rural areas as well as cities, White House coronavirus experts said on Sunday.

Meanwhile, Congress is still deadlocked over the next round of economic relief, meaning that tens of millions of Americans have now lost a $600 per week federal unemployment supplement.

Eyes will turn to the U.S. manufacturing PMI data for July, at 10 AM ET (1400 GMT), to see if there's an impact from the second wave of the Covid-19 outbreak.

On Friday, Fitch placed U.S. government bonds on a negative outlook, citing concerns about the deterioration in the country’s public finances, but demand for Treasurys is still strong in these turbulent times. Bond yields have fallen to their lowest level since the pandemic-induced market turmoil in March.

“The dollar's decline is likely to continue. Real U.S. interest rates are declining even as the country is running a big current account deficit, a situation we hadn't had for a long time," said Minori Uchida, chief currency analyst at MUFG Bank, in a Reuters report.

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