Dollar Rally Sends These Currencies To 1 Month Lows

The US dollar traded higher against all of the major currencies on Tuesday on the back of relatively neutral comments from Federal Reserve Chairman Jerome Powell. Although Powell described the outlook as highly uncertain and said “the path forward will depend on keeping the virus under control and on policy actions taken at all levels of the government,” none of these remarks were surprising. Powell is speaking a few times this week on the coronavirus and the economy but with monetary policy set, comments from his peers could be more market moving. In fact, we were surprised when Fed President Evans said the economy returned to 90% of pre-pandemic levels (because it certainly doesn’t feel that way) and the Fed could raise interest rates before 2% average inflation is reached. Fed President Barkin agreed with Powell that the path of the economy is “critically dependent” on the virus path but he also noted that “spending is coming back faster than employment.” These notes of optimism played a key role in sparking demand for US dollars. Manufacturing activity in the Richmond region was also better than expected while existing home sales rose 2.4%, right in line with expectations. With no major US economic reports scheduled for release on Wednesday the focus will be on Fed speak and Washington headlines.

The rally in the dollar drove sterling, the Australian and Canadian dollars to one-month lows and the euro to a two month low. On a percentage basis, the Australian dollar was the biggest loser but the milestone in euro was more significant. With the second virus wave intensifying in Europe and ECB President Lagarde shifting her stance on the euro’s appreciation, losses were inevitable. In yesterday’s note, we wrote that the pair could slide as far as 1.15, and how quickly this happens will hinge on tomorrow’s Eurozone PMI report. If manufacturing and service sector activity slows in the month of September, it could be the nail in the coffin for the euro.

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