Dollar wallows near two-year low as coronavirus keeps Fed in a bind

The dollar index against six major currencies stood at 93.720, near its lowest since June 2018 this week. ― Reuters pic
The dollar index against six major currencies stood at 93.720, near its lowest since June 2018 this week. ― Reuters pic

TOKYO, July 29 — The dollar languished near two-year lows today as the United States struggled to contain a spike in coronavirus cases, dashing hopes for a quick economic recovery.

The dour outlook for the world’s largest economy is expected to see the US Federal Reserve sticking to a dovish stance at its policy review later in the day, with dollar bears betting it could hint of other ways to loosen policy further down the road.

The dollar index against six major currencies stood at 93.720, near its lowest since June 2018 this week.

The euro traded at US$1.1723 (RM4.98), up slightly on the day though it has stepped back a tad from Monday’s 22-month high of US$1.17815.

The dollar changed hands at 105.05 yen, near a 4-1/2-month low of 104.955 hit the previous session.

Its weakness stemmed from an eroding perception that US economic growth would be stronger than the rest of the developed world and that investors could count on higher returns in the dollar.

US consumer confidence fell more than expected in July, losing steam following two months of recovery, in a fresh sign that rising Covid-19 infections are dampening consumption.

Four US states in the south and west reported one-day records for coronavirus deaths yesterday and nationwide cases stayed high.

“Given the concerns about the second wave of infections, markets think the Federal Reserve is likely to take a dovish policy stance,” said Yujiro Goto, chief FX strategist at Nomura Securities.

Investors will be watching for any indications that the US central bank will increase its purchases of longer-dated debt, implement yield caps or target higher inflation than it has previously indicated when it concludes its two-day meeting today.

Goldman Sachs yesterday noted that a potential Fed shift “towards an inflationary bias” along with record high debt levels by the United States government are raising “real concerns around the longevity of the US dollar as a reserve currency.”

Such worries are spurring a rush to gold, which last stood at US$1,963.5 per ounce, near its record high of US$1,980.5 per ounce yesterday.

In fact, some market players think the dollar is long overdue for a pullback after the Fed’s unprecedented money-printing since March to cope with a pandemic-triggered recession.

The Fed’s balance sheet has swelled about US$3 trillion to as high as US$7.17 trillion, much faster than those of other central banks as banks and corporates around the world sought dollar liquidity to survive lockdowns, though the tally has shrank slightly in recent weeks.

Also weighing on the dollar were uncertainties over an additional fiscal package to support the economy.

Some Republicans in the US Senate have pushed back against their own party’s US$1 trillion coronavirus relief proposal while Democrats have called for much larger support, including a full extension of a US$600-per-week enhanced coronavirus unemployment benefit.

The British pound fetched US$1.2931, having hit a 4-1/2-month high of US$1.2952 yesterday.

The Australian dollar traded at US$0.7170, near its 15-month peak of US$0.7184 touched a week ago, stepping back slightly after data showed Australia’s consumer prices fell by a record in the second quarter. — Reuters

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