US dollar falls as investor sentiment recovers

London

THE US dollar gave up early gains on Tuesday, with currency traders unfazed by diplomatic tensions between the United States and China and rising Covid-19 cases. While stock markets initially fell as investors turned cautious, the safe-haven yen and the Swiss franc were both down on the day by 1105 GMT as market sentiment improved.

A resurgence of Covid-19 infections has caused some areas to place new restrictions on business activity, injecting some caution into the multi-month stock market rally that is betting on a rapid economic recovery.

Markets now face an additional threat from tit-for-tat retaliation between Washington and Beijing over access to US financial markets, civil liberties in Hong Kong, and territorial claims in the South China Sea.

ING analysts said that while the nervousness was supporting the greenback, progress in the European Union's efforts to agree a recovery fund package this week would boost the euro.

Against a basket of currencies the dollar index was last down 0.1 per cent at 96.452, keeping it firmly with a tight range it has traded in since May. The euro recovered and rose 0.2 per cent against the US dollar to US$1.1369. The single currency's rise came despite a widely-watched indicator showing investor sentiment in the eurozone's biggest economy, Germany, worsened somewhat in July.

Scotiabank analysts said in a research note that currencies were now less correlated with equity market trends, which could mean they return to being driven by macroeconomic developments.

"If so, we think that this should support further gains in the euro and related currencies, given that Europe appears to have managed and contained the Covid-19 outbreak more effectively than the US, for example, implying better economic prospects and more attractive investment returns," they said.

Currencies heavily exposed to global trade sentiment rebounded as the day wore on. The Australian dollar rose 0.3 per cent to US$0.6957, although China's offshore yuan slipped slightly to 7.0184 yuan per US dollar.

The yuan was little moved by data showing Chinese imports in June rose for the first time since the Covid-19 panic paralysed the economy, as investors focused on tensions with Washington.

Sterling fell after the economy rebounded in May at a much slower-than-expected pace, calling into question forecasts for a V-shaped recovery. REUTERS