Dollar falls to two-year lows as U.S coronavirus cases surge

[July 29, 2020]  By Saikat Chatterjee

LONDON (Reuters) - The U.S. dollar fell to a two-year low on Wednesday as pressure built on the Federal Reserve to strike a dovish policy stance amid a surge in coronavirus cases.

Markets expect policymakers to hold fire, but rising infection rates and increased tensions is leading some analysts to predict strong forward guidance from the Fed.

"These factors mean we should expect a decidedly more pessimistic assessment of the outlook for economic growth," said Derek Halpenny, head of research at MUFG Bank. "We should also probably expect some focus on the U.S. dollar, given the notable move we have had since the last meeting."

Against a basket of other currencies <=USD>, the dollar fell 0.4% to 93.41, its lowest level since June 2018. It has weakened more than 3% since the last Fed meeting as yields on benchmark U.S. Treasury debt have fallen more than 20 bps since then.

U.S. consumer confidence fell more than expected in July, losing steam following two months of recovery, in another sign that rising COVID-19 infections are cutting into consumption.

"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.
 

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking

The euro traded at $1.1762 <EUR=EBS>, up 0.3%, though it has stepped back from Monday's 22-month high of $1.17815. The dollar traded at 104.82 yen <JPY=EBS>, down 0.25% on the day.

Investors will also be watching for any indications that the Fed will increase its purchases of longer-dated debt, implement yield caps or target higher inflation than previously indicated when its two-day meeting ends on Wednesday.

The weakening dollar also pushed the Australian dollar higher with the currency traded at $0.7185 <AUD=D4>, hitting a 15-month peak after data showed Australia's consumer prices fell by a record in the second quarter.

(Reporting by Saikat Chatterjee; additional reporting by Hideyuki Sano in Tokyo; editing by Larry King)

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