Equity rally, U.S. stimulus stalemate keep dollar on backfoot

[August 13, 2020]  By Ritvik Carvalho

LONDON (Reuters) - The dollar fell to its lowest in a week against a basket of currencies on Thursday, with analysts pointing to equity market resilience and stalemate over additional stimulus for the U.S. economy as reasons for its weakness.

After losing 10% of its value from a peak in March, the dollar index has been bouncing around its lowest levels in more than two years since late July.

On Thursday, it traded 0.3% lower at 93.093 <=USD>. Against the euro <EUR=D3>, the dollar fell 0.5% to $1.1840, adding to a 0.4% decline on Wednesday.

Analysts note recent equity market resilience - despite rising coronavirus cases, the stalemate over a new U.S. relief package, and geopolitical tensions - only works against the dollar.

U.S. stocks rallied on Wednesday with the S&P 500 index <.SPX> reaching record highs.

"The S&P500 briefly touched record highs yesterday, confirming the ability of equities to quickly shrug off negative drivers to sentiment," said Francesco Pesole, FX strategist at ING. "This remains a key point in favour of the dollar-bearish argument."

Risk-on sentiment benefited the Australian dollar, as did better-than-expected jobs data that eased concerns about a persistent coronavirus outbreak in the Australia's second-largest city, Melbourne. <AUD=D4>

The Japanese yen recouped some of its losses from the previous day, trading 0.3% higher at 106.62 per dollar. But by midday in London it gave up those gains and traded flat. <JPY=>

The British pound <GBP=D3> rose 0.5% to $1.3099.

The onshore yuan <CNY=CFXS> briefly rose to a five-month high before steadying at 6.9421 per dollar. U.S. and Chinese officials meet Saturday to review their Phase I trade deal.

U.S. dollar notes are seen in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic

President Donald Trump accused congressional Democrats on Wednesday of not wanting to negotiate over a U.S. coronavirus aid package as Republican and Democratic negotiators traded blame for a five-day lapse in talks over relief legislation.

"The question now is whether this will be enough to prompt a slowdown/correction in the stock rally," Pesole said in a note to clients.

"Latest evidence suggests investors may turn a blind eye to the matter, and the balance of risks remains tilted to the downside for the dollar today as well."

 

The pandemic has taken a particularly heavy toll on the United States, where it has killed more people than in any other country. Millions of U.S. workers have lost jobs, and supplemental federal unemployment benefits expired last month.

Market sentiment has swung between optimism and pessimism, but analysts argue that more stimulus is the most likely outcome because without it the U.S. economic recovery could stall.

Graphic: World FX rates in 2020 https://graphics.reuters.com/
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(Reporting by Ritvik Carvalho; additional reporting by Stanley White in Tokyo; editing by Larry King, Kirsten Donovan)

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