Dollar Moves off Lows, but Experts See Trouble Ahead

Dollar Moves off Lows, but Experts See Trouble Ahead - The dollar trimmed its losses on Friday, but experts warn the recent strength of the greenback is on borrowed time, particularly against the euro, as its interest rate advantage is slipping away amid expectations for rates to drop into negative territory next year.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.17% to 98.73, after hitting a session low of $99.45.

The move of lows comes after investors digested a historic loss of U.S. jobs for the month April as the Covid-19 pandemic led to shuttered businesses across the country.

The U.S. lost 20.5 million jobs last month, the worst on record, but below economists’ forecast of 22 million. The unemployment rate jumped to 14.7%.

But with the parts of the country lifting restriction in recent days, many were quick to suggest that worst was over in the labor market as temporary layoffs made up the bulk of layoffs.

Against the backdrop of rising hopes for an economic recovery, the euro is likely to find its footing and recoup some its losses against the greenback, Commerzbank (DE:CBKG) said.

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“The Corona crisis brought significantly increased volatility to the EUR-USD exchange rate. Nevertheless, we have not changed the EUR-USD forecast,” Commerzbank said. “The higher risk premium for Europe’s currency, from which EUR-USD is suffering, should be partially reduced with the economic recovery.”

In the hunt for yield, meanwhile, investors have favored the U.S. against other countries, some of which have cut rates to below zero.

But this advantage is wearing thin, Commerzbank argues, as U.S. fed funds futures contracts are pricing in a negative fed funds rate in 2021 amid expectations for a recession.

“More importantly, the former interest rate advantage of the U.S. dollar has permanently shrunk. This does not justify a substantial overvaluation of the USD outside of times of crisis. We continue to expect EUR-USD rates around 1.14 by end-2020,” the bank added.

EUR/USD was up 0.13% to $1.0846, but was on track for weekly loss.

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