Currency Economy

Dollar Strengthens; Helped by Housing Data and Fed Comments

By Peter Nurse

(Investing.com) – The dollar posted strong gains in early European trade Wednesday, supported by positive U.S. economic data, comments from a top Federal Reserve official and concerns about a second wave of coronavirus cases in Europe.

At 2:50 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.2% at 94.237, climbing to a eight-week high. 

Additionally, EUR/USD dropped 0.2% to 1.1681, falling to a eight-week low, GBP/USD fell 0.3% to 1.2689, while USD/JPY was up 0.2% at 105.12.

Helping the greenback was U.S. data showed that existing home sales surged to 6 million in August, the highest level in nearly 14 years. This puts September’s PMI sentiment data, due later Wednesday, firmly in focus.

Comments from Chicago U.S. Federal Reserve President Charles Evans also pushed the dollar higher, after he struck a hawkish tone and said further quantitative easing may not provide additional lift to the U.S. economy. He also hinted that it might be possible for the Fed to raise interest rates before inflation starts to average 2%.

A third factor helping the dollar, to the detriment of the euro and sterling, has been worries about surging coronavirus infections in countries like the U.K., France and Spain. On Tuesday, British Prime Minister Boris Johnson announced further restrictions for a possible six months to try and curb a rise in cases.

That said, Deutsche Bank (DE:DBKGn) sees these dollar gains as being temporary, as “a combination of the most negative real rates on record and the widest peacetime twin deficit leaves the dollar vulnerable to further weakness,” the bank’s analysts wrote in a research note. “The two key event risks for the rest of the year risk accelerating these trends.”

The bank sees these two key risks as being the races to win the White House and to produce a Covid-19 vaccine.

For Deutsche, a Democratic sweep in November would leave the dollar most vulnerable because it could lead to more economic stimulus, increasing deficits. And progress on a vaccine would boost expectations for global growth and support risk appetite, undermining the dollar.

Elsewhere, USD/CNY rose 0.2% to 6.7901, after the People’s Bank of China’s yuan fixing was weaker than expected for a second day.

“The fixing has been weaker for two days, which might be a signal that policy makers want to somewhat manage the pace of the rally,” said Hao Zhou, an economist at Commerzbank (DE:CBKG), in a Bloomberg report. “It is time for investors and policy makers to take a break and think about the pros and cons of the rally.”

NZD/USD dropped 0.5% to 0.6603, despite New Zealand’s central bank maintaining the size of its quantitative easing program and kept interest rates at a record low.

The central bank’s Monetary Policy Committee said it was “prepared to provide additional stimulus,” adding that it is making progress on additional tools including negative rates to use if more stimulus is required.

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