The dollar, on Wednesday, July 19, dropped close to multi-month lows as investors wagered any further tightening in the United States would be slow at best, while optimism on China’s economy underpinned Asian shares and commodities.
The U.S. currency was still smarting after the collapse of the Republicans’ push to overhaul healthcare dealt a blow to President Donald Trump’s ability to pass promised tax cuts and infrastructure spending.
The diminished prospect of fiscal spending was a boon to bonds, especially as a run of soft U.S. inflation readings had lessened the risk that the Federal Reserve would need to be aggressive in removing its stimulus, Reuters reports.
“The question marks over U.S. reform on the one hand, and the underlying economic growth momentum on the other hand are likely to keep the U.S. within its current goldilocks scenario for longer,” wrote analysts at Morgan Stanley in a note.
“Globally, financial conditions tend to improve when the dollar is weak and vice versa,” they added. “The falling dollar – still the globe’s major reserve and funding currency – tends to see risk appetite flourishing.”
As a result, yields on 10-year Treasury notes US10YT=RR were down at 2.27 percent having fallen 12 basis points in little more than a week.
That in turn undermined the U.S. dollar which hit its lowest since September against a basket of currencies .DXY. It was a whisker firmer on Wednesday at 94.790, but still down over 7 percent on the year so far.
The euro was steady at $1.1535 EUR=, having made a 14-month top at $1.1583. Investors were wary of pushing the single currency too far in case a European Central Bank policy meeting on Thursday proved less hawkish than bulls were betting on.
The dollar also carved out a two-year low on the Australian dollar and a one-year trough on the Swiss franc CHF=.
Losses have been more limited against the yen as the Bank of Japan has stuck with its massive stimulus campaign and stopped yields there from rising. The dollar was trading at 112.12 JPY= on Wednesday, up from a low of 111.685, Reuters reports.
Speculation that the Bank of England might soon tighten was also dealt a blow by surprisingly soft inflation figures at home, giving the dollar a leg up on the pound GBP=.
