The dollar sank to its lowest level since May 2018 on concern that the world’s biggest economy will struggle to regain momentum amid a standoff over further virus relief and as infections continue to mount.
The greenback has now erased most of the gains it built on the back of U.S.-China trade tensions that started heating up around two years ago, fueling worries about global growth prospects. This time investors see the U.S. as the potential laggard amid questions over the government’s response to the pandemic. The euro climbed to a two-year high, extending its advance since last month’s landmark European Union stimulus package brightened the region’s prospects relative to the U.S.
The dollar has been on the defensive since mid-year, with U.S. lawmakers unable to agree on measures to support the economy’s recovery from the pandemic, and with the nation’s real yields dropping to multiyear lows. On top of all that, investors’ attention is turning to the November presidential election and the uncertainty that may bring.
The primary argument to support US Dollar strength over the last few years was supply related. The Federal Reserve was raising interest rates and simultaneously reducing the size of its balance sheet.
Never mind whether that was a contributing factor in the pop in high yield spreads at the end of 2018 or the freezing up of the repo market in the autumn of 2019. The supply deficit was a central factor in boosting the value of the Dollar simply because there were fewer of them around. The situation could not be more different today.