LONDON, Sept 2 — The dollar extended overnight gains today and the euro fell, retreating from the key US$1.20 (RM4.98) level reached in the previous session, while the Australian dollar lagged behind after the country confirmed it is in a recession.

The dollar strengthened overnight, helped by positive US manufacturing data and technical factors.

It extended gains in early London trading, then stabilised as the morning progressed, with the dollar index at 92.586 at 1054 GMT, up 0.4 per cent on the day.

Commerzbank analyst Thu Lan Nguyen said that, although the long-term economic fallout from coronavirus is unknown, it is countries’ relative economic performance that drives exchange rates — in addition to monetary policy developments.

"The US dollar was able to benefit from significantly improved ISM data yesterday which suggest a continued high-speed recovery, thus increasing the likelihood that the US might be able to overcome the crisis comparatively better after all,” she wrote in a note to clients.

The euro fell, down 0.4 per cent at US$1.18645 at 1055 GMT, backtracking from the key US$1.20 level it hit for the first time since 2018 on Tuesday.

The euro has surged more than 10 per cent since its low point in March and, although it was unmoved by Tuesday’s eurozone inflation data being unexpectedly negative, investors took profits after European Central Bank chief economist Philip Lane said that the euro-dollar rate "does matter” for monetary policy.

"(Lane’s comment) shows that the ECB is not ignoring what is happening on the inflation front,” said Kenneth Broux, FX strategist at Societe Generale. "The risk is that if inflation undershoots the target, the stronger the euro becomes.

"It’s interesting because it shows the ECB’s being rattled by this incessant appreciation of the euro, or decline of the dollar,” he added.

"What I would expect now is a bit more euro profit-taking before the ECB meeting next week, because investors obviously are going to heed Lane’s comments now,” he said.

Investors will now be looking to see if the ECB will follow the US Federal Reserve in shifting its policy towards inflation, as it reviews its monetary policy, Broux said.

Along with the euro, the Australian dollar was a laggard among G10 currencies, down 0.4 per cent on the day at 0.7341 at 1108 GMT.

Worse-than-expected Australian gross domestic product data confirmed the country’s economy shrank 7 per cent in the three months to June, putting it in its first recession in nearly three decades.

The country was also hit yesterday by China’s suspending barley imports from Australia’s largest grain exporter, adding to tensions between China and Australia which, until recently, had left Australia’s agricultural products largely unscathed.

Risk currencies were little changed on the day: the Norwegian and Swedish crowns were down 0.1 per cent versus the dollar, while the New Zealand dollar was broadly flat .

German retail sales fell unexpectedly, down 0.9 per cent in July, missing a Reuters forecast for a 0.5 per cent increase and countering hopes that household spending could drive a strong recovery from the coronavirus shock.

The spread of Covid-19 continues to limit activity, with Poland set to ban direct flights from 44 countries, including Spain, Israel and Romania.

In the United States, there remain "serious differences” between Democrats and the White House over proposed government aid. — Reuters