Forex - Dollar Slumps, Euro Has Best Month in a Decade

© Reuters.

By Peter Nurse

Investing.com - The dollar slumped in early European trade Friday, heading for its weakest month in 10 years, as traders fretted about the U.S. economic recovery due to the continued spread of the Covid-19 virus across the Midwest and the failure of U.S. lawmakers to agree a new round of stimulus measures.

At 2:50 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.4% at 92.648, having fallen as low as 92.523, a new two-year low.

Elsewhere, USD/JPY was up 0.4% at 104.36, a 4-1/2-month low, GBP/USD was up 0.3% at 1.3135, a 4-1/2-month high. 

Leading the charge has been the euro, with EUR/USD up 0.4% at 1.1898, up 5.8% this month, and well on course to post its biggest monthly gain in 10 years.

"At the root of the dollar's weakness is the fact, which was highlighted by Fed Chairman (Jerome) Powell the other day, that U.S. coronavirus cases started to increase in mid-June, curbing consumption and sending the economy downhill," said Daisuke Uno, chief strategist at Sumitomo Mitsui (NYSE:SMFG) Bank, Reuters reported.

Evidence of the economic weakness was delivered by the second quarter GDP data, which showed the U.S. economy contracted by a massive 32.9% annualised during that quarter.

That data may well be old news, but initial claims for unemployment benefits increased 12,000 to a seasonally adjusted 1.434 million in the week ending July 25, a sign that recovery in the labor market is stalling.

Meanwhile, U.S. President Donald Trump has created even more uncertainty over the upcoming presidential election, while Republicans and Democrats appear to be no closer to reaching consensus on the latest stimulus measures, with some earlier measures set to expire later Friday.

At the same time, the U.S. has reported almost 4.5 million Covid-19 cases, according to Johns Hopkins University data, while states like Florida and Arizona reported a record increase in new deaths for a third day in a row on Thursday.

Turning to technical analysis, the dollar has room to drop a lot more versus the euro.

“EUR/USD is through tough resistance at 1.1815/33, this was a 61.8% Fibonacci retracement, a 12-year resistance line and the September 2018 high. We are surprised that this has not held the initial test. The break above here targets 1.2635/66, the 200-month ma,” said Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank (DE:CBKG).