July 24 (Reuters) - The dollar index fell to its lowest level in nearly two years due to perceived risk divergence between the U.S. and other major economies, largely related to pandemic containment and economic fallout mitigation concerns. Markets are looking to see if the infection pace slows, and how delayed Senate progress on the next relief bill plays out. That, while wondering how much worse U.S. relations with China will get.
EUR/USD benefited from above-forecast euro Markit PMIs vs mostly stagnating U.S. PMIs , which helped push the 10-year Bund-Treasury yield spreads back to the March high, which in this case, is the least negative, near -1%. EUR/USD has breached 1.1639, a 161.8% Fibo objective off the June 22-23 base . If the overbought uptrend stalls near there it could trigger a needed near-term correction, but longer-term technical targets are near 1.18.
The main currency mover today was the rallying haven yen, with USD/JPY breaking below July and May lows near 106 to its lowest point since the March pandemic-induced collapse to 101.18. Treasury yields, stocks and confidence in the U.S. economic recovery all weakened. July is already the worst month for USD/JPY since January 2018. A weekly close below the 106.70 weekly kijun and 106 May lows could bring a slide to the 104.00s, where 2018-19 lows found a foothold. The break below there in the initial pandemic response was fleeting, as was this month's breach of a potential head & shoulders top neckline dating back to June 2013 just above 106.
Throwing fuel on the yen’s fire were major setbacks in overbought EUR/JPY and AUD/JPY crosses after they ran into resistance by prior 2020 highs the preceding two days.
The pound managed to gain ground on the dollar, getting close to June’s 1.2812 post-pandemic plunge rebound peak, but it’s flat against the euro and down roughly 45bps vs the yen. Above-forecast UK PMIs offered support, but they was sort of in-line with upbeat European PMIs.
Falling stocks and rising volatility made for a mixed session in high-beta currencies and commodities.
There is some concern that trade with China may eventually be impacted by escalating friction with the U.S. . The EU today also set some restrictions in response to China’s Hong Kong security law .
Theeconomic calendaris pretty light ahead of Wednesday’s FOMC. The meeting isn’t expected to break any new policy ground, but will be watched for Powell’s comments now that the pandemic has worsened since the last meeting, something not factored into the Fed’s previous economic and policy assessment.
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(Editing by Terence Gabriel Randolph Donney is a Reuters market analyst. The views expressed are his own.) ((Randolph.Donney@thomsonreuters.com))
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