July 28, 2020 / 1:27 AM / 14 days ago

Dollar bounces before Fed meeting, further weakness expected

NEW YORK - The dollar index bounced off a two-year low on Tuesday but looked primed for further weakness as the United States continued to see a rise in coronavirus cases, while the Federal Reserve is expected to maintain very loose monetary policies.

FILE PHOTO: Stacks of U.S. $100 notes are piled up after counting at the Korea Exchange Bank (KEB) in Seoul November 7, 2008. REUTERS/Jo Yong-Hak/File Photo

The dollar index against a basket of currencies =USD gained 0.18% to 93.71, after dropping to 93.47 on Monday, the lowest since June 2018.

“I think the market is just taking a pause, it’s been a fairly relentless dollar selloff,” said Vassili Serebriakov, an FX strategist at UBS in New York.

The continued spread of coronavirus is hampering the U.S. economic recovery, while regions like Europe appear to have the virus contained.

“The global economy has been recovering from COVID somewhat unevenly, but I think the base of the recovery in places like Europe and China is looking more encouraging than in the U.S.,” said Serebriakov. “The dollar is countercyclical, so when the global economy picks up the dollar tends to weaken.”

Florida reported a record one-day rise in coronavirus deaths on Tuesday, and cases in Texas passed the 400,000 mark.

Republicans in the U.S. Senate pushed back on Tuesday against their own party’s $1 trillion coronavirus relief proposal, the day after it was unveiled by Majority Leader Mitch McConnell.

Data on Tuesday showed that U.S. consumer confidence fell more than expected in July.

The euro EUR= dipped 0.26% against the dollar to $1.1720, after reaching $1.1781 on Monday, the highest since September 2018.

Ultra-loose Fed policy is also weighing on the U.S. currency.

Investors will be watching for any indicatons that the U.S. central bank will increase its purchases of longer-dated debt, implement yield caps or target higher inflation than it has previously indicated when it concludes its two-day meeting on Wednesday.

Goldman Sachs on Tuesday noted that a potential Fed shift “towards an inflationary bias” along with record high debt levels by the United States government are raising “real concerns around the longevity of the U.S. dollar as a reserve currency.”

The dollar remained weak against several currencies on Tuesday.

It dipped 0.29% to 105.06 yen JPY=, after earlier getting as low as 104.94 yen, the weakest since March 13.

Sterling gained 0.49% to $1.2944, the highest since March 11.

Editing by Marguerita Choy and Cynthia Osterman

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