Dollar heads for biggest monthly drop in a decade

Investors worry that a rebound in the US economy could be derailed by the struggle to stem the coronavirus epidemic

by Reuters
Dollar heads for biggest monthly drop in a decade
US GDP dropped by a staggering 32.9% in the second quarter and, with confidence declining in the Trump administration's ability to curb the coronavirus, that weakness has spread to the US currency. File photo: AFP.

The dollar extended its dramatic fall on Friday, putting it on course for its biggest monthly drop in a decade as investors fretted that a rebound in the US economy would be derailed by the struggle to stem the coronavirus epidemic.

Weakness in the US currency propelled the euro higher, with the single currency touching $1.19, its strongest since May 2018, and enjoying its best month since Sept 2010.

Confidence in the US currency was undermined further after US President Donald Trump on Thursday raised the possibility of delaying the nation’s November presidential election.

That came on the same day advance gross domestic product (GDP) data showed contraction of an annualised 32.9% in the second quarter, the quickest pace since the Great Depression.

The dollar index slid to as low as 92.546, levels last seen in May 2018.

It has fallen 4.9% in July, with most of the drop coming in the last 10 days as new cases of coronavirus surged across several US states and some recent data pointed to an economic recovery losing steam.

Unicredit analysts said they “continue to expect the USD weakness to persist in August, a month in which abrupt moves in intraday activity tend to be more likely due to lighter market conditions.”

“However, given ongoing global economic growth concerns, worries about further Covid-19 developments and the depreciation the US dollar has already suffered in the past few weeks, we think that downward pressure on the greenback over the coming month will be less intense than it has been recently.”

The euro surged to as high as $1.1908 before settling at $1.1897, up 0.5% on the day.

The euro traded below $1.10 as recently as May, but after European Union leaders agreed this month to a 750-billion euro economic recovery fund – while also taking on debt jointly in a major boost to regional cooperation - many investors have warmed to the single currency again.

On a trade-weighted basis, the euro is at its highest since 2014.

“Disinflationary pressure from the unprecedented hit to demand alongside the strengthening euro will keep pressure on the ECB to deliver further policy stimulus,” MUFG analyst Lee Hardman said.

The dollar’s drop this month has given currencies that were hit hard in March and April, when investors rushed for the safety of the greenback as panic over the coronavirus gripped markets, space to rebound.

Against the yen, the dollar hit a 4-1/2-month low of 104.195 yen and last stood at 104.36, having lost 3.3% this month.

The British pound surged to $1.3143, a four-and-a-1/2-month high. It was slightly weaker versus the euro at 90.60 pence.

The Swiss franc extended its rally against the dollar, with the US currency losing another 0.3% to 0.9057 francs, its weakest since early 2015.