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The dollar was down on Friday morning, touching two-year lows and on its way to posting its biggest monthly decline in a decade as fresh doubts over the U.S economy’s recovery from the COVID-19 pandemic creep in.

These doubts have led investors to question the dollar’s strength. Data released on Thursday showed that the U.S. economy contracted by 32.9% in the second quarter and that 1.434 million unemployment claims were submitted in the week ending July 25.

On the political front, Republicans and Democrats are also no closer to reaching consensus on the latest stimulus measures, with only one more day left before some earlier measures expire on Friday.

Ever-rising numbers of COVID-19 cases also continue to pose a challenge to the U.S.’ economic recovery. The country reported almost 4.5 million cases as of July 31, according to Johns Hopkins University data, and continues to hold the dubious honor of recording the highest number of COVID-19 cases globally.

“At the root of the dollar’s weakness is the fact, which was highlighted by Fed Chairman (Jerome) Powell the other day, that U.S. coronavirus cases started to increase in mid-June, curbing consumption and sending the economy downhill,” Daisuke Uno, chief strategist at Sumitomo Mitsui (NYSE:SMFG) Bank, told Reuters.

Meanwhile, U.S. President Donald Trump added to the dollar’s woes on Thursday after he floated the idea of delaying the U.S. presidential elections, currently scheduled for November 3. But the proposal was immediately rejected by Congress, the sole governmental authority that could make such a change.

“The mere suggestion by Trump of a delay does play to concerns that the election result will be challenged in November (should Trump lose), and that, because of the likely larger than usual share of votes via mail in ballots due to the pandemic, we might not now (get) the result on election night itself,” Ray Attrill, Head of FX Strategy at National Australia Bank (OTC:NABZY), told Reuters.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies slipped 0.28% to 92.645 by 9:53 AM ET (2:53 AM GMT).

The USD/JPY pair was down 0.45% to 104.25.

The AUD/USD pair gained 0.34% to 0.7218 and the Dow Jones New Zealand (USD) pair was up 0.04% to 0.6701.

The USD/CNY pair slid 0.30% to 6.9870. The country’s National Bureau of Statistics said that the official manufacturing purchasing managers’ index (PMI) for July was 51.1, indicating expansion in factory output.

The GBP/USD pair gained 0.29% to 1.3131.

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The U.S. dollar has recovered moderately in early European trade Thursday, reversing earlier losses, but the long-term prognosis for the greenback continues to look less healthy.

At 3:AM ET (0700 GMT), the ICE (NYSE:ICE) Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 96.135. EUR/USD dropped 0.1% to 1.1398, GBP/USD dropped 0.3% to 1.2544, and USD/JPY was flat at 106.92. 

Helping the dollar Thursday has been the continued rise of Covid-19 cases globally, as a flurry of localized outbreaks across the world pushes the overall number of infections to 13.5 million and the death toll to nearly 600,000 deaths, according to Johns Hopkins University data.

China reported a 3.2% growth in its second-quarter GDP year-on-year, a sharp bounce back from the first quarter’s 6.8% contraction, although the yuan weakened slightly as monthly data showed a surprising drop in retail sales that suggested ongoing weakness in consumer demand. 

“Global market trends are increasingly looking like a renewed relative rotation out of the stay-at-home winners (tech, USD) towards reflation trades (Dax, energy, EM FX) and not a global/US growth scare,” said analysts at Danske Bank, in a research note. 

“We continue to see EUR/USD as being part of this rotation,” Danske added. “With this in mind (and we have not even begun to price Brexit optimism) we have started to think we can overshoot our short-term 1M and 3M target at 1.15.”

The Dollar Index is expected to weaken about 2% to 94.1 by the second quarter of next year, according to an analyst survey compiled by Bloomberg. 

Additionally, Deutsche Bank’s Trade-Weighted Dollar Index has dropped more than 1% so far this month, Bloomberg reported, and is set to test the trendline in place since 2011, a break of which would be an important signal for dollar bears. 

Looking ahead, the European Central Bank meets later Thursday, but is unlikely to deliver another easing package so soon after June’s moves.

“We expect a repetition of recent comments from various governing council members, thereby striking a cautiously optimistic tone compared to the June projections

Important U.S. economic data are due later Thursday, with initial jobless claims set to a slowly improving employment situation, while analysts will be watching to see if May's big jump in retail sales can be repeated.

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• EUR/USD corrects lower after recent tops around 1.1450.
• A test of the YTD peak just below 1.15 stays on the cards.

After recording new 4-month tops around 1.1450 on Wednesday, EUR/USD is now shedding some ground and slips back below the 1.14 mark.

The ongoing downside is seen as corrective only, leaving the probability of a visit to yearly tops near 1.15 well on the table in the short-term horizon.

Furthermore, as long as the 200-day SMA, today at 1.1055, holds the downside, further gains in EUR/USD are likely.

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• NZD/USD is staying under bearish pressure following Wednesday's climb.
• Upbeat GDP data from China failed to provide a boost to NZD.
• US Dollar Index is staging a recovery ahead of key data.

The NZD/USD pair gained around 30 pips on Wednesday but struggled to preserve its bullish momentum on Thursday. As of writing, the pair was down 0.45% on the day at 0.6540.

Eyes on US data

Earlier in the day, the data from China showed that Industrial Production expanded by 4.8% on a yearly basis in June and the Gross Domestic Product expanded by 11.5% on a quarterly basis in the second quarter. However, annual Retail Sales in China contracted by 1.8% in June and didn't allow the China-proxy NZD to gather strength against its rivals.

Meanwhile, the souring market sentiment put additional weight on the risk-sensitive kiwi's shoulders and caused the bearish pressure to remain intact.

In the second half of the day, the weekly Initial Jobless Claims and Retail Sales data will be featured in the US economic docket. Ahead of these data, the US Dollar Index (DXY) is up 0.2% on the day at 96.23 and the S&P 500 futures are losing 0.65% on the day. If risk-aversion continues to dominate the financial markets in the second half of the day, the DXY could push higher and drag the pair toward 0.6500.

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The slump in the dollar is threatening to bring to an imminent end its near-decade-long uptrend against major peers.

Deutsche Bank’s Trade-Weighted Dollar Index -- a gauge of the currency against the U.S.’s most important trading partners -- has fallen to test the trendline in place since 2011, a break of which would be an important signal for dollar bears. The index has dropped more than 1% so far this month amid weakening demand for havens, an ongoing rally in risk assets and a shift in sentiment toward currencies like the euro and yuan.

Dollar strength has been a feature of much of the last 10 years. The trade-weighted basket climbed over 40% from the 2011 low to its recent peak in March, at the height of coronavirus fears. Yet a growing chorus of commentators is calling for the currency to decline, as the global economy attempts to recover from the impact of the pandemic.

The ICE (NYSE:ICE) U.S. Dollar Index -- another gauge of the currency -- is expected to weaken about 2% to 94.1 by the second quarter of next year, according to an analyst survey compiled by Bloomberg. It traded around the 96 level Thursday.

“Improving domestic economic trends in the euro area and China, as well as our rising conviction in structural dollar weakness over time, reinforce our view that the dollar is poised to weaken against these major currencies,” wrote Goldman Sachs Group Inc (NYSE:GS). strategist Zach Pandl this week.

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The loonie gained on the dollar on Wednesday after the Bank of Canada kept its key interest rate unchanged and said the slump in the economy was not as bad as feared.

USD/CAD fell 0.73% to C$1.3512, its lowest in since July 9.

The Bank of Canada (BoC) kept its benchmark interest rate at the effective lower bound of 0.25% and vowed to keep rates unchanged until at least 2023.

In a boost to hopes of a robust recovery, the central bank said recent data had suggested the economy had bottomed in April.

"We now estimate that the economy contracted by about 15 percent in the first half of this year," the central bank said in its monetary policy statement. "As deep as this is, it suggests the economy has avoided the most dire scenarios we laid out in the April MPR. In the third quarter, we expect to continue to see a strong rebound in jobs and output."

The BoC did, however, its 2022 growth outlook, indicating that "permanent scarring from the COVID-19 pandemic (less investment, less immigration, permanent business closures) will reduce the economy’s long-term productive capacity by 4%," RBC said.

The central bank also pledged to continue to purchase bonds in an effort to keep rates low across the yield curve and support lending activity.

"The bank will continue its large-scale asset purchase program at a pace of "at least $5 billion per week of government of Canada bonds," said BoC governor Tiff Macklem.

Beyond monetary policy, the loonie was also supported by a rise in oil prices and upbeat Canadian manufacturing data.

Manufacturing sales in Canada rose by 10.7% in May, beating expectations for a 9.5% increase.

Manufacturing could likely build on the gains made in May as early reports for June - improvements in the Canada manufacturing PMI and a jump in manufacturing hours worked -  have been a "little more positive

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• Upside appears more compelling amid a potential bull flag.  
• A test of 3250 likely as buyers cheer vaccine hopes.
• 3191 is the level to beat for the bears in the near-term.

Having faced rejection below Monday’s high in Asia, S&P 500 futures, the risk barometer, holds sizeable gains to battle 3200 levels amid broad market optimism, courtesy of Moderna’s coronavirus vaccine progress.

The price has entered a phase of consolidation since then, which has now taken the form of a bullish flag on the hourly chart. This is a bullish continuation pattern and an hourly close above the falling trendline resistance at 3210 will confirm the formation.

The bulls will likely target Monday’s high at 3226 en route the psychological level of 3250 in the near-term.

Alternatively, the immediate downside will be limited by the falling trendline support at 3197, below which the bullish 21-hourly Simple Moving Average (HMA), now placed at 3,191, will test the bears’ commitment.

The next support awaits at the 50-HMA of 3180, which could offer some temporary respite to the bulls.

All in all, the path of least resistance appears to the upside, with bullish hourly Relative Strength Index (RSI) at 58.81.

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China's economy will continue to recover, with limited COVID-19 effect on its sovereign credit, The Paper reported, citing global credit rating agency Moody's.

Compared with countries with the same rating level, China's government debt will maintain at a medium level, Moody's said at an online seminar held on Tuesday.

Global economy is resuming vitality slowly, and the road to recovery is likely to be prolonged and winding, according to Moody's.

The agency predicted developed economies in the G20 would see their GDP shrink by 6.4 percent this year, and rebound to 4.8 percent in 2021, while emerging economies in the G20 would contract by 1.6 percent this year, then rebound to 5.9 percent in 2021.

Although some countries saw signs of recovery, economic downward risks still remained, the rating agency said, adding the epidemic is likely to come again in the second half of this year.

If so, it could lead to further lockdowns, making it more difficult for governments to help and roll out support measures. Meanwhile, longer or repeated shutdowns could drive up the number of enterprise closures, as well as the unemployment rate.

Most countries' real output in 2021 will be lower than the level before the epidemic, Moody's said.

The credit rating agency said the epidemic will change global credit trends. Developed economies will face heavier debt burden due to slow economic growth and weaker financial capacity.

Due to the epidemic, countries have realized that they should raise the safety of supply chains and reduce dependence on single suppliers.

And the global trade pattern will hence become more scattered, while the reorganization of supply chains will be shorter and more diversified, Moody's said. "Though it could be healthier, however it could also lead to low efficiency and high inventory," it added.China's economy will continue to recover, with limited COVID-19 effect on its sovereign credit, The Paper reported, citing global credit rating agency Moody's.

Compared with countries with the same rating level, China's government debt will maintain at a medium level, Moody's said at an online seminar held on Tuesday.

Global economy is resuming vitality slowly, and the road to recovery is likely to be prolonged and winding, according to Moody's.

The agency predicted developed economies in the G20 would see their GDP shrink by 6.4 percent this year, and rebound to 4.8 percent in 2021, while emerging economies in the G20 would contract by 1.6 percent this year, then rebound to 5.9 percent in 2021.

Although some countries saw signs of recovery, economic downward risks still remained, the rating agency said, adding the epidemic is likely to come again in the second half of this year.

If so, it could lead to further lockdowns, making it more difficult for governments to help and roll out support measures. Meanwhile, longer or repeated shutdowns could drive up the number of enterprise closures, as well as the unemployment rate.

Most countries' real output in 2021 will be lower than the level before the epidemic, Moody's said.

The credit rating agency said the epidemic will change global credit trends. Developed economies will face heavier debt burden due to slow economic growth and weaker financial capacity.

Due to the epidemic, countries have realized that they should raise the safety of supply chains and reduce dependence on single suppliers.

And the global trade pattern will hence become more scattered, while the reorganization of supply chains will be shorter and more diversified, Moody's said. "Though it could be healthier, however it could also lead to low efficiency and high inventory," it added.

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The euro has been in demand in early European trade Wednesday, hitting a four-month high after Federal Reserve Governor Lael Brainard hinted at a need for an even easier monetary policy in the U.S.

The dollar also suffered more broadly from a rise in risk appetite after positive test data for one of the lead candidates for a Covid-19 vaccine late, published late on Tuesday.

At 2:55 AM ET (0655 GMT), EUR/USD gained 0.1% to 1.1408, after reaching its highest level since March 10 at $1.1423 earlier in the session. EUR/GBP dropped 0.2% to 0.9060, with sterling helped by stronger than expected inflation figures in June, but the euro had posted a two-week high of 0.9112 late Tuesday.

Additionally, the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 96.093, GBP/USD gained 0.4% to 1.2595 and USD/JPY was flat at 107.23. 

The single currency has benefited of late--it’s up 1.3% against the dollar over the last month--from the perception that the region has handled the Covid-19 crisis better than most.

"Germany, France and Italy have all taken severe lockdown steps and as a result the coronavirus now appears to be under control. The economy could be gradually recovering," said Bart Wakabayashi, Tokyo Branch manager of State Street (NYSE:STT) Bank and Trust, to Reuters.

The economic picture still is grim, however. Only last week, the European Commission downgraded its outlook for the EU economy, saying it would now contract by 8.3% in 2020. However, recent confidence data have tended upward, with Tuesday’s German ZEW survey pointing to continued optimism over the next six months.

Looking ahead, “the forthcoming ECB meeting should not change much, with the discussion/progress on an EU Recovery Fund being a more important short-term driver for the EUR/USD,” said analysts at ING, in a research note.

There still remain doubts about whether the EU leaders will reach agreement on a 750-billion-euro pandemic recovery fund at this week's summit, amid resistance from more frugal member states.

That said, German Chancellor Angela Merkel, who now holds the presidency of the EU Council, was in no doubt of the need of the fund and the importance of its size.

"Because the task is enormous, the answer must also be huge," she said Monday, after hosting Italian Prime Minister Giuseppe Conte for talks.

"It must be particularly powerful in order to signal clearly that Europe wants to hold together in this difficult time. There is a political dimension to it".

Any potential progress on the recovery fund at the EU summit “should translate into support for EUR/USD for the remainder of the week, with the ECB meeting playing second fiddle,” ING added.

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 The dollar was down on Wednesday morning in Asia, with investors continuing the previous session’s retreat from the safe-haven asset as data released on Tuesday indicated increased U.S. inflation.

The U.S. Consumer Price Index (CPI) posted a 0.6% increase month-on-month, its highest in almost eight years. The figure beat analyst forecasts prepared by Investing.com, which predicted a 0.5% increase as well as May’s 0.1% decrease.

The data eased investor fears of deflationary pressures on the U.S. economy from the COVID-19 economic downturn.

Meanwhile, investors also cheered Tuesday’s report that U.S. biotech firm Moderna 's (NASDAQ:MRNA) experimental COVID-19 vaccine is safe and generated immune responses in all 45 volunteers who are part of the ongoing study.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies fell 0.11% to 96.073 by 9:50 PM ET (2:50 AM GMT).

The USD/JPY pair was up 0.01% to 107.23. The Bank of Japan is due to release its policy statement later in the day, with monetary policies widely expected to remain unchanged.

The USD/CNY pair was down 0.09% to 7.0000. U.S. President Donald Trump said on Tuesday that he has issued the order to end Hong Kong’s preferential trade status. Trump also signed legislation sanctioning Chinese entities involved with enacting the city’s national security laws.

The AUD/USD pair gained 0.49% to 0.7008 and the NZD/USD pair was up 0.32% to 0.6561. The two risk-sensitive Antipodean currencies benefitted from improved investor sentiment.

The GBP/USD pair gained 0.28% to 1.2584.

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