Dollar Erases Trade-War Gains After Sinking to Lowest Since 2018

The dollar sank to its lowest level since May 2018 on concern that the worlds 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 regions 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.

“Momentum is on the bears side now, and until the U.S. can get the virus under better control, I think the dollar remains under pressure,” said Win Thin, chief currency strategist at Brown Brothers Harriman.

The Bloomberg Dollar Spot Index fell as much as 0.6% on Tuesday, dropping for a fifth straight session and bringing its 2020 decline to around 1.7%.

Wagers on dollar losses by hedge funds and other large speculators have been building, but have yet to reach the levels seen in 2017 and 2018, according to Commodity Futures Trading Commission data.

“Broader positioning against the USD is not overly stretched,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. Investors and speculators are “only just starting to embrace the short USD story. There is room for this move to run.”

The dollar failed to gain much traction Tuesday even after a report showed U.S. housing starts surged in July amid record-low interest rates. The resilience in that corner of the economy comes as roughly 15 million Americans remain out of work in the coronaviruss wake.

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With some investors still skeptical about the durability of the recovery and the Federal Reserve buying billions of dollars of Treasuries to support markets, benchmark U.S. yields remain not far above record lows. With their premium over global peers narrowing, the dollars appeal is dimming on that front too.

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The 10-year U.S. real yield, which is the rate after stripping out inflation, is now only about 30 basis points above its German counterpart. Thats the smallest spread since 2014.

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