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CURRENCIES

US dollar falls to two-year lows before Fed decision

London

THE US dollar fell to a two-year low on Wednesday, as pressure built on the Federal Reserve to strike a dovish policy stance amid a surge in coronavirus cases fuelling demand for riskier currencies like the Norwegian crown and the Australian dollar.

Financial markets expect policymakers to hold fire on fresh steps, but rising infection rates are leading some analysts to predict strong forward guidance from the Fed on further policy actions.

"Even if the Fed doesn't come out explicitly signalling more policy support, the dollar's outlook remains weak thanks to the diverging trends in coronavirus cases between Europe and the US," said Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank.

Against a basket of other currencies, the US dollar fell 0.4 per cent to 93.41, its lowest level since June 2018. It has weakened more than 3 per cent since the last Fed meeting as yields on benchmark US Treasury debt have fallen more than 20 basis points since then.

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Investors will also be watching for any indications the Fed will increase its purchases of longer-dated debt, implement yield caps or target higher inflation than previously indicated, building on recent massive stimulus measures.

Goldman Sachs on Tuesday said a potential Fed shift "towards an inflationary bias" along with record high US government debt levels are raising "real concerns around the longevity of the US dollar as a reserve currency".

But John Vail, chief global strategist at Nikko Asset Management said the greenback was still up 1 per cent in the year to date as measured by JP Morgan broad trade-weighted nominal index, despite recent weakness.

The weakening US dollar pushed the Australian dollar higher with the currency trading at US$0.7185, hitting a 15-month peak after data showed Australia's consumer prices fell by a record in the second quarter.

The euro traded at US$1.1762, up 0.3 per cent, although it has stepped back from Monday's 22-month high of US$1.17815.

The US dollar traded at 104.82 yen, a four-month low and down 0.25 per cent on the day.

For investors, the euro's strength has been vindicated by a recent fiscal stimulus deal reached by European Union leaders last week, with charts and derivatives expecting the single currency to strengthen to US$1.20 levels in the short term. REUTERS

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