Dollar stays weak amid signs of lagging U.S. economy

By Olga Cotaga

LONDON, August 5 (Reuters) - The dollar extended declines on Wednesday as euro zone data reassured after a U.S. coronavirus relief package stalled in Congress, pushing U.S. bond yields downas investors weighed prospects of further Fed easing.

Euro zone business activity returned to modest growth in July as many curbs imposed to stop the spread of the coronavirus were lifted, while official estimates showed retail sales volumes rebounded in June.

The euro traded up 0.5% at $1.1862 EUR=EBS, having risen to above $1.19 in the past days as a hardening perception that the U.S. economic recovery is lagging Europe has buttressed the common currency.

Final U.S. PMI numbers are due later in the day and so is the ISM non-manufacturing index and the ADP national employment data.

Neil Jones, head of European hedge fund sales at Mizuho, said the upshoot in the euro reflected the unity shown by Europe in tackling the coronavirus-induced slowdown, while in Washington a stalemate continued over fiscal policy.

That could leave the Federal Reserve with more work to do, hastening a steady decline in U.S. Treasury yields.

U.S. 10-year yields were close to the five-month low they hit on Tuesday US10YT=RR and 10-year Treasury Inflation-Protected Security (TIPS) yields also held near record lows US10YTIP=RR.

Jones said the risk-on environment was playing a big part as well, as the price for gold hit a record high above $2,000. XAU=.

"I am expecting the euro to continue higher ... The first test is $1.20 and then I'll probably review it, with a potential for $1.25," he said.

White House negotiators and congressional Democrats are trying to reach a deal on a relief package by the end of this week, with Treasury Secretary Steven Mnuchin saying on Tuesday that progress had been made.

Most other major currencies were also up against the dollar, pushing its index towards last week's two-year low of 92.53. It traded down 0.3% at 92.88=USD.

The Chinese yuan rose to a five-month high of 6.9384 against the dollar in the offshore market and was last up 0.5% CNH=EBS.

Growth in China's services sector showed signs of a slowdown in July from a ten-year high the previous month, as new export business fell and job losses continued, a sister survey showed, pointing to cracks in the sector's post-COVID recovery.

The Canadian dollar surged to nearly a six-month high of 1.3245 versus the greenback, trading up 0.5% on the day CAD=D3.

"The market has finally seen the stop-loss cascade that we have been looking for... If bids get pulled lower, this collapse could potentially run down to the low 1.31s," wrote Stephen Gallo, currency analyst at BMO Capital Markets, in a note to clients.

Euro near 2-year highhttps://tmsnrt.rs/33uZUsO

(Reporting by Olga Cotaga; editing by John Stonestreet)

((olga.cotaga@thomsonreuters.com;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.