Dollar treads water as political impasse slows rally

[August 04, 2020]  By Iain Withers

LONDON (Reuters) - A dollar rebound faltered on Tuesday as political wrangling over a U.S. relief plan and a gloomy economic outlook weighed on the currency.

A man counts U.S. dollar banknotes next to Lebanese pounds at a currency exchange shop in Beirut, Lebanon April 24, 2020. REUTERS/Mohamed Azakir

After its worst month in a decade in July, the greenback started August on a firm note as some investors trimmed their short positions.

That only carried it so far, however, and the dollar was broadly flat in lunchtime European trading hours on Tuesday against a basket of currencies, after earlier slipping 0.3%. <=USD>

The euro - which gained 5% at the dollar's expense in July - edged up 0.1%, last at $1.1772. <EUR=EBS>

"I think the eurozone recovery will be a lot faster than the U.S. recovery and that growth differential will continue to drive EUR/USD higher," Marshall Gittler, head of investment research at BDSwiss, said in a note.

The Aussie dollar <AUD=D3> edged ahead 0.3% after the central bank held policy steady, as expected.

Australia's central bank predicted that the economic recovery would be uneven. The country's second biggest state Victoria is under lockdown to fight a resurgence of the virus.

Despite a slowdown in new U.S. virus cases and encouraging factory data, investors are reserving judgement on whether a U.S. economy with 30 million people out of work can really lead the world's recovery.

Top White House officials and Democratic leaders in the U.S. Congress were due to try again on Tuesday to narrow gaping differences over a fifth major coronavirus-aid bill to help stimulate the economy. Days of closed-door negotiations have so far yielded few results, participants say.

"We're still in a situation (worldwide) where the market wants to believe the recovery is on track but is still worried about the COVID situation," said Bank of Singapore FX analyst Moh Siong Sim.

"The fiscal wrangling in the U.S. is the next key test for risk sentiment, and if they manage to get a deal - which seems likely - that could be supportive of risk sentiment."

(Reporting by Iain Withers; additional reporting by Tom Westbrook in Singapore; editing by Barbara Lewis and Gareth Jones)

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