The dollar fell in Asia on Wednesday, hitting a five-month low on the yuan, as the latest coronavirus relief package stalled in Congress and U.S. yields sank on the prospect that further monetary easing might be needed to support the economy.
A hardening perception that the U.S. recovery is lagging Europe has buttressed the euro, which has repelled a rebound in the dollar and rose back above $1.18 on Wednesday.
At the same time speculation that stalemate over fiscal policy in Washington could leave the Federal Reserve with more to do, has hastened a steady decline in U.S. yields – undermining the dollar more broadly.
Sterling, the Australian dollar and the kiwi all climbed back toward pre-pandemic highs, while the yen rose and gold soared as real yields plumbed record lows.
“U.S. economic outperformance, relative to the eurozone and Japan, is no longer guaranteed given the damage from the COVID-19 pandemic,” said Tai Hui, J.P. Morgan Asset Management’s chief strategist in Asia.
“Dollar interest rates are also converging to other developed economies’ interest rates, which means that the dollar is less appealing,” he said, adding it is difficult to see the Fed easing policy ahead of its global peers.
The Australian dollar led gains among the majors with a 0.4% rise to $0.7189. Ten-year Australian government debt now yields about 31 basis points more than 10-year U.S. government debt, up from 16 basis points two months ago.
The New Zealand dollar rose 0.3% to $0.6646, catching some support from a surprise dip in the jobless rate. The yen rose 0.1% to 105.60 per dollar and sterling edged higher to $1.3091.
Even the Chinese yuan, which had struggled to capitalise on the dollar’s weakness amid simmering Sino-U.S. tensions, forged higher to a five-month top of 6.9570 per dollar in onshore trade.
Other Asian currencies also made gains, notably the Malaysian ringgit which was stronger than 4.2 per dollar for the first in five months.
The dollar has been sliding since March, but its prime antagonist in recent weeks has been the euro, which in July posted its best month in almost 10 years.
That has the common currency more or less back where it began life in 1999 and has many investors convinced it can keep climbing as a Europe-wide fiscal relief package anchors recovery and allays perennial worries about the bloc’s stability.
“Right now, looming long-term negative U.S. issues – like the dollar’s reserve status as the U.S. and China decouple – are at the forefront of FX concerns, and not the euro’s structural problems,” said Deutsche Bank strategist Alan Ruskin.
“The door to $1.20+ remains wide open,” he said.
For now, eyes are on Washington where White House negotiators have vowed to work “around the clock” with congressional Democrats to try to reach a deal on coronavirus relief by the end of this week.
The next economic updates are due later on Wednesday, with services surveys in Britain and Europe in the morning and U.S. private payrolls data around 1215 GMT.
Investors expect steady services growth in Europe and a slowdown in U.S. in hiring, with surprises on any front likely to illuminate the apparent divergence between Europe and the United States.
Analysts at ING have also noted that equity investors have yet to really buy into the European recovery story – and say a pile-in could provide even more support to the currency.
“Buy-side surveys suggest that investors are still heavily overweight U.S. equities, especially tech stocks, and are minded to rotate into the Eurozone and see the euro as cheap,” said ING’s global head of markets Chris Turner.
“If that rotation comes to pass … then euro/dollar may be a $1.25 story after all.”