By Peter Nurse
Investing.com – The dollar drifted lower in early European trade Wednesday, but ranges are tight as investors try to digest a combination of upbeat economic data, a gloomy prognosis from the Federal Reserve chairman, worries about a second Covid-19 wave and diplomatic tensions in Asia.
At 3:05 AM ET (0705 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 96.852. EUR/USD gained 0.2% to 1.1286 on the back of a clear improvement in EU-wide car registrations in May, but faces a test from eurozone CPI data later.
The risk-sensitive AUD/USD rose 0.2% to 0.6897. GBP/USD was largely flat at 1.2570 after a bout of weak consumer and producer price inflation figures that may raise the chance of further monetary easing at Thursday’s Bank of England meeting.
U.S. consumer spending rebounded in May as retail sales rose almost 18%, the biggest monthly increase in records dating back to 1992 – albeit one that followed its biggest ever drop in April. The data point was the latest sign that the worst of the economic shock from the pandemic may have passed.
However, Federal Reserve chairman Jerome Powell poured cold water on any enthusiasm as he painted another bleak picture of the U.S. economy or Congress. His testimony continues later Wednesday.
“Chairman Powell’s semi-annual monetary policy testimony to the Senate reinforces the view that while the Fed is encouraged about the recent data flow as the economy re-opens, we are a long way from ‘normality’ and that won’t arrive there is confidence we have overcome Covid-19,” said analyst James Knightley at ING, in a research note.
Yet Beijing is struggling to contain a fresh outbreak in the Chinese capital, while in the U.S. infections are hitting record highs in six states.
Additionally, tensions have been rising between China and India, with clashes at a disputed border site leaving 20 Indian soldiers dead as well as an unspecified number of Chinese casualties.
Still, Wednesday’s slip by the greenback may prove to be the precursor of a much larger move, if Stephen Roach, Yale University senior fellow and former Morgan Stanley (NYSE:MS) Asia chairman, is to be believed.
Roach predicted Monday a 35% decline in the U.S. currency against its major rivals in the near future, citing increases in the nation’s deficit and dwindling savings.
He added that the rise of China and the decoupling of the U.S. from its trade partners is likely to end the supremacy of the dollar as the world’s reserve currency.