Dollar sinks to two-year low on US economic concerns

The dollar weakened to a two-year low on Monday as sharp increases in US coronavirus cases and flare-ups around the world weighed on investor confidence.

The dollar index, which measures the currency against a basket of trading peers, slipped 0.7 per cent to its lowest level since June 2018, as fears mount that the continuing spread of Covid-19 in America will damp the economic recovery.

The poor performance of the US currency has supported a rally in gold prices to their all-time high, which climbed on Monday as much as 2.2 per cent to a record $1,944.71 per troy ounce.

“The thing that’s changed in the last few days is that it’s not just gold which has gone up against the dollar, but almost everything,” said Kit Juckes, foreign exchange strategist at Société Générale.

The Japanese yen, another perceived haven, strengthened 0.8 per cent to a four-month high of ¥105.30 per dollar. The pound rose 0.8 per cent to $1.2848 and the euro gained 0.5 per cent to $1.1745. The euro, which is the biggest weight in the dollar index, has not traded above $1.17 since late September 2018.

“That’s partly driven by a sense that the US is having a harder time controlling the virus than others, which will see the US economy underperform,” Mr Juckes added.

Florida overtook New York on Sunday as the state with the second-highest number of confirmed infections, behind only California, as fatalities in some of the most populous US states have followed the surge in cases.

Futures tied to the S&P 500 were up 0.5 per cent on Monday, pointing to the US stocks benchmark index opening higher when trading begins on Wall Street after falling in the previous two sessions.

European equity markets were flat in morning trading, with the regional benchmark Stoxx index overturning early losses to gain 0.1 per cent and London’s FTSE 100 down 0.1 per cent — weighed down by significant losses for airlines after the UK warned on travel to Spain.

“This weekend we perhaps got a glimpse of how challenging life will be this winter without a vaccine,” said Deutsche Bank strategist Jim Reid, pointing to rising case numbers in the US and parts of Europe and Asia.

Spain has faced a sharp uptick in cases across three regions, with Germany also reporting a rise. The situation has continued to deteriorate across Latin America while Asia, Hong Kong and the Australian state of Victoria have also seen significant increases.

Line chart of USD index showing US dollar sinks to lowest level in two years

The dollar’s weakness came ahead of Republicans unveiling their proposals for a new round of stimulus later on Monday. Existing benefits, passed at the start of the coronavirus crisis in March, are due to expire at the end of the month and economists fear the withdrawal or reduction of stimulus at a fraught moment for the world’s biggest economy.

Traders are also looking ahead to a meeting of the US Federal Reserve’s rate-setters on Wednesday and the release of US second-quarter gross domestic product figures on Thursday. Expectations are for the central bank to keep interest rates at close to zero.

Tension between the US and China was heightened at the weekend by the arrest of a Chinese researcher who American authorities said had been hiding in the country’s San Francisco consulate. Washington has alleged that the researcher is a member of the Chinese military.

Qi Gao, a currency strategist at Scotiabank, said tit-for-tat closures of consulates in Houston and Chengdu last week had stoked tension to the point that it had weighed on the US currency. “In the coming weeks you’ll see the dollar weakening further,” he added.

Asian equity markets were mixed. China’s CSI 300 index of Shanghai and Shenzhen-listed stocks added 0.5 per cent while Hong Kong’s Hang Seng slipped 0.4 per cent.