Forex – Dollar Weakens Amid Recovery Concerns, More Losses Seen Likely

The dollar weakened in early European trade Friday, amid doubts about the pace with which the U.S. economy will rebound from the coronavirus-inspired slowdown.

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 92.662. USD/JPY was down 0.2% at 105.57, while EUR/USD was up 0.1% at 1.1868.

Dragging the greenback lower was the news Thursday that applications for U.S. unemployment benefits increased, defying consensus forecasts for a further decline, while the Philadelphia Fed reported a disappointing reading for its manufacturing index.

This came a day after the Federal Reserve warned that the path to U.S. economic recovery from the Covid-19 outbreak remained highly uncertain, with the recovery in hiring starting to slow.

“A widening budget deficit paired with a continued trade deficit is an issue for the USD,” said analyst Andreas Steno Larsen at Nordea, in a research note, “but mostly when the rest of the world catches up growth-wise, as has been the case since the reopening of the global economy during Q2.”

The euro has been the biggest beneficiary of a recent decline in the dollar, but this tone could be tested with the release of eurozone manufacturing data later in the session.

That said, “the EUR has much further to go when/if the market realizes that the tail risks in the EUR are much smaller now compared to 9-12 months ago,” Larsen said, adding that the USD could weaken by as much as 20-25% over the coming two years, aiming “for (at least) >1.25 levels in EUR/USD.”

Elsewhere, GBP/USD traded 0.2% higher at 1.3240, helped retail sales rising above their pre-coronavirus level in July, as shops selling non-essential goods opened again after the lockdown in March.

Retail sales volumes rose by a much stronger than expected 3.6% from June and were 1.4% higher than in July 2019, the Office for National Statistics said, representing a sharp recovery from double-digit falls in April and May.

Additionally, USD/CNY dropped 0.1% to 6.9071, after earlier falling below 6.90 for the first time since January.

The Chinese currency has responded favorably to the idea that the trade agreement between China and the U.S. could well stay intact despite a recent escalation of tensions, as Beijing confirmed the two countries plan to hold talks soon and White House economic advisor Lawrence Kudlow said he expected China to make major purchases of U.S. oil and other exports soon.