Forex - Dollar Weakens; More Losses Likely

The dollar weakened in early European trade Tuesday, as political wrangling over a U.S. relief plan and the gloomy economic outlook kept investors shy of the currency.

At 2:50 AM ET (0650 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 93.442.

Elsewhere, USD/JPY was up 0.1% at 106.05, GBP/USD was up 0.1% at 1.3078, while EUR/USD was up 0.1% at 1.1775.

After its worst month in a decade in July, the dollar posted gains Monday, helped by better-than-expected manufacturing data, but this positive tone has been short lived.

Weighing heavily is the inability of the U.S. lawmakers to agree on a new coronavirus relief bill, hitting optimism for a prolonged recovery. This contrasts with the recent agreement in Europe of a proposed 750 billion euro recovery fund.

Adding to the dollar woes is the narrowing of government bond yields between EU and U.S.

"(T)he roots of the USD depreciation cycle now in train lie in the sharp compression in previously USD-favoring yield differentials … On this basis alone, there should be much more to come by way of USD weakness," analysts at National Australia Bank said, in a research note, Reuters reported.

That said, it’s not only the perceived risker currencies that the dollar is losing ground against.

The yen and the Swiss franc have also gained versus the greenback in positioning terms, analysts at ING said, in a research note. “This can be read as further evidence that investors are finding less and less interest in buying the dollar as a safe-haven asset compared to the alternative low-yielders.”

“This appears to be largely a function of the rising idiosyncratic risks facing the dollar on the domestic side, as a worsening Covid-19 contagion picture keeps postponing most US states’ re-opening plans; if anything, it suggests more restrictions are on the cards. It also casts further doubts about the prospect of a rapid economic rebound,” ING added.