Forex – Dollar Weakens; Economic Recovery in Doubt

© Reuters.  © Reuters.

By Peter Nurse – The dollar sold off sharply in early European trade Monday, weighed by doubts about the strength of the U.S. economic recovery ahead of the Federal Reserve’s policy meeting later this week.

At 3:10 AM ET (0710 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.5% at 93.907, trading at levels not seen since May 2018.

Elsewhere, was down 0.6% at 105.53, falling to a four-month low, was up 0.3% at 1.2820, reaching a four month high, while was up 0.5% at 1.1708, having earlier reached a 22-month high.

The dollar is weighed down by a number of factors, including a worsening row with China and the uncertainty surrounding November’s presidential election. However, of prime concern are doubts about the strength of the U.S. economic recovery as the country struggles to cope with Covid-19’s second wave.

The U.S. reported on Thursday its first rise in since March, largely as a result of a number of populous states having to roll back reopenings because of the pandemic.

“High frequency data already pointed to a stalling of the US recovery in recent weeks,” said analysts at Danske Bank, in a research note. “July’s U.S. PMIs confirmed this picture with the showing further improvement but remaining in contraction territory in contrast to its European counterpart.”

The Commerce Department is due to give its first take on second-quarter on Thursday, with analysts forecasting a bruising 34% annualized decline during the three-month period. Ahead of that, orders for the month of June are due later Monday.

The Federal Reserve meets this week, with its two-day meeting ending Wednesday, amid growing expectations that the will have to support the economy once more.

The emergency phase when the corona crisis was at its peak is over, and “now comes the next phase of supporting the recovery – a recovery, which several Fed members over the past weeks have said will take several years,” said analyst Morten Lund, at Nordea, in a research note. “As [Fed board member Lael] Brainard therefore put it in her recent speech, the focus of monetary policy will now shift from stabilization to accommodation. What those ‘accommodation tools might look like will be the focal point” of the FOMC meeting.

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