US Dollar Rally Attempt Fizzles as Hopes of Quick Economic Recovery Fade Amid COVID-19 Aid Stalemate

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Following the U.S. Dollar index’s first higher close the week-ending August 7, the prospects for a short-squeeze were high at the start of the week, but those expectations fizzled despite a steep rise in U.S. Treasury yields. The price action may have been influenced by a stalemate in Washington over coronavirus aid that is now expected into early September.

Last week, September U.S. Dollar Index futures settled at 93.085, down 0.327 or -0.35%. Early in the week, the index touched a high of 93.895, but failed to accelerate to the upside on the move.

Conditions were even worse in the cash market, which continued to diverge from the futures contact. The cash market U.S. Dollar Index fell for its eighth straight week as investors looked at other currencies whose economies are currently outperforming that of the United States in terms of managing the coronavirus pandemic, Reuters said.

The dollar’s eight consecutive weeks of losses represents its longest weekly run of declines in a decade, Refinitiv data showed, with Friday’s decent batch of U.S. economic data failing to lift the greenback.

Essentially, the higher coronavirus case counts in the U.S. are leading to longer restrictions that are curtailing the economy’s recovery. As the number of infections continue to rise, it produces a drag on the economy and that slower recovery is putting the U.S. behind the pace of the other developed economies.

Stimulus Hopes Fade as Policymakers Adjourn Until After U.S. Labor Day Holiday

Hopes for additional stimulus to combat the pandemic faded at the end of the week, with the Senate and House of Representatives in recess until at least after the September 7 U.S. Labor Day holiday and no fresh talks scheduled with U.S. President Donald Trump’s negotiators.

Meanwhile, Trump announced on Friday the White House is preparing to provide relief for the economic pain caused by the virus as legislation stalls in Congress, saying his administration is ramping up to send money to families, state and local governments, and businesses. However, traders showed little reaction to his announcement.

Euro Will Determine Fate of US Dollar

If the dollar couldn’t rise last week after U.S. Treasury yields hit levels not seen since mid-July and on the back of improving economic data then it’s going to have a hard time mounting a rally this week. However, there is always the possibility of another attempt at a short-squeeze that will have nothing to do with the economic data, but rather oversold conditions.

Furthermore, the growing faith in Europe’s rebound and concern about the U.S. response as the coronavirus spreads and politicians remain deadlocked over the next relief package should continue to provide support for the Euro.

The Euro represents about 57% of the dollar index, so a strong rally in the single-currency will have a hugely negative impact on the greenback.

Generally speaking, the dollar is vulnerable to further downside pressure because Europe is perceived as moving forward, while the United States is looked at moving backward.

This article was originally posted on FX Empire


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