Battered U.S. Dollar 'Hanging By A Thread' As Coronavirus Cases Grow

July 22, 2020, 4:25 PM  By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - A steady decline in the dollar has accelerated in recent weeks, as a resurgent coronavirus outbreak in the United States and improving economic prospects abroad sour investors on the currency.

The buck is down 8% from its highs of the year against a basket of currencies <=USD> and stands near its lowest level since 2018. Net bets against the dollar in futures markets are approaching their highest level in more than two years.

"The dollar is hanging by a thread," said Mazen Issa, senior currency strategist at TD Securities in New York. "At this point, the dollar-weakness mindset has become deeply entrenched."

A range of factors are driving the U.S. currency's decline. For years, expectations that the United States would outperform other economies kept the dollar elevated against many of its peers.

That performance gap is increasingly expected to narrow. European Union leaders earlier this week clinched a massive stimulus plan and have been largely successful in their efforts to contain the coronavirus. Meanwhile, outbreaks across large swaths of the United States have all but extinguished hopes of a quick economic turnaround there.

Analysts at Société Générale expect real gross domestic product growth in both the United States and Europe to take big hits next year. Yet they project a 5.2% rebound for EU growth in 2022, compared with a 2.5% bounce in the United States. The euro <EUR=EBS> is up 9% from its lows of 2020.

"Investors don't know what the U.S. is doing" regarding the coronavirus pandemic, said Richard Benson, co-chief investment officer at Millennium Global Investments in London. "That has been a big drag on the U.S. dollar."  His firm began betting on a weaker dollar and stronger euro in May.

At the same time, the Federal Reserve has said it intends to keep rates at historic lows, narrowing a gap in yields between the United States and Europe that has boosted the dollar over the years.

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