By Geoffrey Smith
Investing.com -- The dollar extended its slide in early trading in Europe on Friday, as the prospect of collapsing U.S. interest rates continued to erode its appeal vis-à-vis its peers.
Relatively high nominal returns on dollar assets, whether bonds or stocks, have been the key to the dollar’s strength over the last couple of years. But with the U.S. equity market in retreat and bond yields collapsing under the expectation of further interest rate cuts from the Federal Reserve, that argument no longer holds. The release of the U.S. labor market report later, which is expected to show a clear slowdown in hiring last month, is unlikely to change much in that regard.
By 2:50 AM ET (7:50 GMT), the dollar index that tracks the greenback against a basket of developed market currencies was down 0.3% at a two-month low of 96.520, on course for a decline of 1.6% for the week.
Its biggest losses were against the kiwi, which rebounded 0.5% amid tentative signs that the Chinese economy is picking itself off the floor. However, it also fell against the safe haven yen and Swiss franc.
USD/JPY fell below 106 for the first time since August during Asian trading and was down 0.2% at 105.89. Zach Pandl, the Goldman Sachs’s co-head of global foreign exchange and emerging market strategy, told Bloomberg TV that the yen could rally as far as 95 if global markets stay disorderly for the next couple of months. USD/CHF fell 0.1% to 0.9443.
The euro also hit its highest against the dollar since August, amid concerns that the European Central Bank can’t do anything to stop the differential between euro and dollar interest rates falling further. The ECB’s governing council meets next week, against a backdrop of expectations that are limited to a 10 basis-point cut in the deposit rate and some tweaking of the bank’s long-term refinancing operations.
The ECB is likely to ‘look through’ a surprisingly strong rise in German factory orders in January, which predated the scare over the coronavirus and in any case owed much to volatile elements such as aerospace.
EUR/USD rose as high as $1.1249 before retracing to $1.1234, roughly flat from late Thursday but still up nearly 1.9% this week.
The weak tone in the dollar also helped sterling to its highest level in a week, ahead of the government’s annual budget next week. Sterling has been supported by promises of big increases in public spending that would – all other things being equal – have removed the need for further interest rate cuts from the Bank of England. Analysts at Pantheon Macroeconomics expect a relatively modest widening of the fiscal deficit to 2.4% of gross domestic product from 2.0% in the current fiscal year.
“We expect the Chancellor to be relatively cautious this year, in order to preserve his firepower for 2021, when the economic costs of Brexit will seriously start to mount,” said Pantheon analyst Samuel Toombes. GBP/USD was up 0.2% at $1.2974.