The US dollar sank to its lowest level in 10 months, reflecting growing doubts among investors that the Trump administration can deliver sweeping economic stimulus after the failure to replace Obamacare.
Investors sold the dollar against a host of currencies on Tuesday, with the euro climbing above $1.15 to its highest level since May 2016 ahead of a European Central Bank policy meeting on Thursday. China’s renminbi touched a fresh eight-month high, while the dollar index, a trade-weighted measure of the US currency versus its main rivals, dropped to 94.779, its weakest since September.
The dollar has been a barometer of prospects for the Trump administration’s efforts to enact pro-growth policies of tax cuts and fiscal stimulus. As the administration has become bogged down in the past six months handling healthcare reform and dealing with the Russia scandal, the reserve currency has steadily retreated.
Lacklustre economic data, notably a weaker tone for inflation and retail sales for June, have prompted the bond market to reduce the likelihood of further interest rate increases from the US Federal Reserve.
Lee Hardman, currency analyst at MUFG, called the events in Washington “a significant blow”, pointing out that the dollar “had already been left vulnerable by building expectations that the Fed will slow the pace of monetary tightening by potentially delaying the next rate hike until next year”.
Since the dollar peaked at the start of the year, its weakness has reflected doubts that healthcare reform can create substantial net savings to pay for big reductions in tax rates for individuals and companies.
Central banks have indicated a desire to pull back on aggressive monetary stimulus, further weighing on the dollar.
The Australian dollar strode 1.6 pet cent higher to $0.7924 on Tuesday and was at a two-year peak after minutes from its central bank’s June meeting included a surprisingly upbeat assessment of the economy.
“The [US] dollar will struggle to find buyers for the time being,” said Stephen Gallo, European head of forex strategy at the Bank of Montreal.
“There is just too much pessimism and uncertainty in the way. FX investors will simply not shift to pricing in real progress on the budget, debt ceiling and corporate tax reform while the healthcare bill is still basically in limbo.”
Emerging market currencies are in vogue, with the dollar used as a funding currency for carry trades, where investors borrow in lower rate currencies to fund bets in higher yielding alternatives. The South African rand strengthened as much as 1 per cent to R12.90 a dollar on Tuesday. Russia’s rouble was 0.4 per cent firmer at Rbs59.11 a dollar and Korea’s won rose 0.5 per cent, to Won1,127.30 a dollar.