Dollar Crumbles Again as U.S. Stocks Shake Off Concerns Over Virus, Recovery and China

Dollar Index tests support as losses build in North American session.
- Lifting EUR and GBP toward range highs as resilient stocks dominate.
- But 'real rates' matter to USD too, analysts say, and they're bottoming.
- Coronavirus advances in U.S. as China tensions seen brewing again.

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The Dollar crumbled Wednesday as investors again demonstrated an increasing aversion to the greenback that pushed the Dollar Index back to late June lows while lifting Pound Sterling and the Euro to multi-week highs.

Dollar losses built further in the North American session as the greenback was sold hand over fist while U.S. stock markets and American bond yields both rose, leaving counterparts in Europe behind. 

Price action came amid signs the coronavirus is gaining fresh momentum in the U.S. and as the relationship with China appeared headed for the rocks again, but this is after risk appetite was bolstered Monday by an Institute for Supply Management survey suggesting the services sector returned to growth in June.

"The focus for the US continues to be the economic recovery, which has outweighed a rise in cases that has become the latest bit of bad news to be shrugged off by a market focused on good news and on the positive overspill from the Fed’s liquidity operations," says Chris Beauchamp, chief market analyst at IG. "We are seeing focused selling of the US dollar, pushing the euro and sterling higher and keeping indices on this side of the Atlantic in check." 

Above: Pound-to-Dollar rate alongsideS&P 500 futures (orange) with 21, 55 (red) and 200 day (green) moving-averages.

The PMI gave a sharp boost to domestic stock markets in that session which was subsequently unwound on Tuesday and may have indirectly aided the greenback's losses Wednesday. It has a negative relationship with stocks while currencies like Sterling and the Euro have gained alongside U.S. equities to an uncanny extent since March.

U.S. stock markets have continued to climb even as a second wave of coronavirus infections threatens to derail the economic recovery, thanks largely to the popularity of technology shares that have benefited from business model resilience to the damaging effects of measures used to contain the virus.

If U.S. stock performances are sustained then the Dollar might be in danger of breaking down further and falling back to its March lows against major rivals, although there are no guarantees they will be and any falls might be likely to lift the often safe-haven Dollar. 

"What is clear is that countries that have managed the COVID crisis better through to very low levels of new cases and deaths are now reaping the rewards with individuals appearing to respond more positively to lockdown reversals," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.

Above: Euro-to-Dollar rate alongside S&P 500 futures (orange) with 21, 55 (red) and 200 day (green) moving-averages.

New York Governor Andrew Cuomo said in a press conference that rising national infection numbers are threatening progress across the state, America's third largest by GDP after Texas and California. Concerns are rising there as authorities in Texas, California and Florida race to contain second wave outbreaks that have crystallised and swelled quickly in the weeks since each took steps to reopen their economies in May and June. 

This was after another spike in new infections took total U.S. coronavirus cases across the 3 million threshold Tuesday, according to Worldometers, while at the global level the number crossed 11.9 million. Tuesday's increase came in at 208k and just shy of a new high. As a result, earlier efforts to reopen economies are being reigned in and consumer aversion to public places like restaurants has picked up in what is a mounting threat to the U.S. recovery.

"There are increasing risks of the data turning less favourable in the US relative both to the initial phase of recovery and to Europe. So we remain cautious over the sustainability of the rally in US equity markets. But much of these risks are well known in the markets," Halpenny says. "Fed policy, expectations of more fiscal stimulus and the resilience of tech can propel equities higher. That implies continued USD underperformance for now...We do not expect to see GBP fortunes change unless a Brexit deal is agreed and we would view no news from last night as more likely bad news!"

Above: Dollar Index at daily intervals with S&P 500 (orange), Fibonacci retracements of March rally and 'death cross' comprised of 50-day moving-average crossing over 200-day average to the downside. 

The Dollar Index fell by nearly half a percent Wednesday as the greenback sustained losses against all of its other constituents as well as all major currencies, leaving the benchmark testing the 78.6% Fibonacci retracement of the March rally higher. This was in no small part due to gains in the Pound-to-Dollar and Euro-to-Dollar exchange rates which were both found testing three-week highs but would be likely to suffer if tensions with China hamper confidence in the stock market.

President Donald Trump was reported late Tuesday to have proposed undermining the USD/HKD peg in retaliation for China's insertion of its security apparatus into Hong Kong. The White House also confirmed it's looking to ban social media firm TikTok from the U.S. while Federal Bureau of Investigation director Christopher Wray was quoted describing Huawei as a "serial intellectual property thief" and China as "engaged in a whole-of-state effort to become the world's only superpower by any means necessary."

"The weaker USD narrative has focused on the risk rally and longer-term structural concerns, but we show the compression of real rates (Fed easing) accounts for 65-80% of USD depreciation since March. The relentless drop in US real rates also means the search for yield remains paramount affecting most investor classes," says Adarsh Sinha, a strategist at BofA Global Research"The USD has been relatively stable in the face of the latest collapse in real rates but our technical strategist flags confirmation of a death cross in the DXY (50d average below the 200d average), which is typically associated with a weaker dollar in subsequent weeks." 


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