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By Tom Westbrook
SINGAPORE (Reuters) – The dollar surged to a two-year low on Tuesday as pressure faded before the Federal Reserve meeting and political wrangling over the next US fiscal rescue package came to a conclusion.
The world’s reserve currency has been deteriorating since May and was dumped in recent days as a crack in American coronavirus recovery and a drop in yields sent investors elsewhere.
Buyers exited the woodwork after a rebound in gold price halfway through the Asian session, lending greenback support and pushing other large companies from the milestone peaks.
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Most analysts maintain that the decline in real yields, particularly due to the broader fall of the dollar, remains intact, but that the pace of the decline likely stalled a standstill – particularly in the Fed meeting and the off-spending US spending package. with.
“It is probably a case of the market moving ahead of itself,” said Bank of Singapore currency analyst Moh Sayng Sim.
On the horizon is a Fed meeting that begins after the Tuesday and Friday deadlines for the US Congress to raise unemployment benefits – both unexpectedly enough to inject some nerves against the dollar.
The () dollar rose from a two-year low of 93.492 to 93.918 against a basket of currencies. It is still down 3.6% in July and will need a strong upside to avoid posting its worst month in nearly a decade.
No policy changes are anticipated at the Fed’s meeting on Wednesday, but investors expect its super-easy outlook to be reaffirmed and speculation about further guidance being thrust.
One change could be average inflation targeting, which the Fed would aim to push inflation above its 2% target for years of under-shooting.
This possibility has pressurized US real yields, sending yields on inflation-protected 10-year paper
But a lift in nominal yields, pushing the 10-year () to a one-week high of 0.63% on Monday, suggests investors may “sell the fact”, even if the Fed seems to be.
“The (Fed) announcement could be a damp clause, or sell some modest fixed income to take advantage,” said Steve Engler, head of global G10 FX research at Standard Chartered (OTC 🙂 in New York.
A larger US fiscal package – currently a deadlock in negotiations between Democrats who have proposed $ 3 trillion, and Republicans who have made a more modest $ 1 trillion plan – could also boost the dollar if it Passes.
The current Republican plan would reduce an expanded unemployment benefit from $ 600 a week to $ 200 when some 30 million Americans are out of work.
American consumer confidence and manufacturing data due to 1400 GMT will also market to read the latest on progress in the US economic recovery.
On the virus front, the rate of US infection may have stabilized, with a 2% drop in the number of new cases last week – but the economic impact is only being felt to stop its spread and prevent job losses.