• Edwick Haron

Dollar Slumps to Multi-year Lows; EUR/USD tracks 1.20

The dollar slumped in early European trade Tuesday, falling to multi-year lows against many currencies, with traders viewing the Federal Reserve’s new stance on inflation as a valid reason to sell the greenback.

At 2:50 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 91.860, having earlier reached a two-year low of 91.773. GBP/USD was up 0.3% at 1.3412, near its strongest level in almost a year, while EUR/USD was up 0.4% at 1.1981, at its highest since May 2018.

The Fed's historic switch last week to focusing more on average inflation and higher employment means it has leeway to keep benchmark rates lower for longer, encouraging those with a negative view on the dollar to sell the currency.

“The bear trend is under way,” said analyst Petr Krpata at ING, in a research note, “with the narrative of negative U.S. real rates for longer making the dollar fairly unattractive over upcoming months and quarters.”

While EUR/USD has posted strong gains so far Tuesday, the pair is struggling to break through the 1.20 level, seen as a key resistance point. Ahead lies important Eurozone data, including manufacturing PMI releases, German unemployment figures and inflation numbers, with the potential for a rebalancing should they disappoint.

That said, Goldman Sachs (NYSE:GS) expects a break through the 1.20 level to just be a matter of time.

"Our markets team expects the euro to strengthen further from here - to 1.25 against the dollar in twelve months and roughly 2.5% on a trade-weighted basis—as we expect the euro area economy to outperform other countries and see the euro as under-owned in international portfolios and under-valued in our fair value models," said Sven Jari Stehn, chief European economist at Goldman Sachs, in a research note late last week.

"Euro appreciation primarily reflects an improvement of the economic outlook and constructive institutional change in the euro area’s fiscal architecture. The stronger euro is, therefore, unlikely to be a significant concern for the ECB at this stage." 

Elsewhere, AUD/USD gained 0.3% to 0.7399, near a two-year high, after Australia’s central bank left both the cash rate and three-year yield target unchanged at 0.25%, as expected.

Additionally, USD/CNY dropped 0.5% to 6.8161, the strongest level since May 2019, after China’s Caixin manufacturing Purchasing Managers’ Index for August increased to 53.1, marking the sector's fourth consecutive month of growth and the fastest rate of expansion since January 2011.

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