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The U.S. dollar continued to slide versus major rivals, with one closely followed index dropping to a two-year low Monday. But the move might say less about the U.S. economy than the world, analysts said.
The ICE U.S. Dollar Index DXY, -0.83%, which tracks the buck against a basket of six major rivals, fell 0.8% Monday to 93.675 and traded at its lowest since July 2018. Meanwhile, gold on Monday continued its rally to hit an all-time high.
“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. That’s partly driven by a sense that the U.S. is having a harder time controlling the virus than others, which will see the U.S. economy underperform.,” said Kit Juckes, global macro strategist at Société Générale, in a note.
But, he argued, “pessimism about the U.S. economy is a less reliable source of strength for other currencies, than optimism about the global outlook.”
Indeed, a number of analysts make the case that a weaker dollar should remain supportive for stocks but that U.S. equities would be likely to underperform their international counterparts.
Read: Here’s what a falling U.S. dollar means for the stock market
The dollar surged to a three-year high in March as the near-shutdown of the global economy triggered financial market turmoil and a scramble for the U.S. currency. The dollar subsequently retreated as equity markets recovered and central banks and governments responded with stimulus measures.
The decline for the dollar accelerated in recent weeks on a rise in coronavirus cases in the U.S. and indications of a pickup in global economic activity.
The euro EURUSD, +1.03% has rallied strongly versus the dollar, getting an added lift last week as European leaders agreed on a substantial package of grants and loans aimed at easing the pandemic blow in the region’s hardest hit countries. The euro was up 1% at $1.1777, trading at its highest level versus the dollar since September 2018.
The dollar’s rally earlier this year amid financial market turmoil underscored the greenback’s role as a haven currency, tending to rally as assets perceived as risky, including equites, fall — and vice versa. Investors will remain alert to any sign that the relationship is breaking down and that dollar weakness, fueled by worries over the domestic outlook, is accompanied by sustained weakness in equities, analysts said.
Bearish dollar sentiment has been attributed to a range of factors, including the massive amounts of dollar liquidity pumped into the market by the Federal Reserve, expectations the central bank will amplify its bearish tone at this week’s policy meeting, and jitters around the November presidential election, said Jane Foley, senior FX strategist at Rabobank, in a note.
But she said dollar weakness might be overdone, with the currency remaining a “practical safe haven” for many types of investors.
“Given current concerns about the threats to the global economy, we see risk that recent selling pressures may be overdone,” she said.
Juckes argued that the “potential for risk aversion to return by the weekend seems unusually high, to me” with second-quarter gross domestic product data due from the U.S. and Europe, the Fed meeting and the U.S. Congress struggling to put together a second coronavirus rescue program ahead of the expiration of additional unemployment benefits at the end of the month.
