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US dollar drops 4.9% in July, and is already close to demonstrating the worst monthly dynamics in the last ten years.
"The main reason for the dollar's decline is the surge of new COVID-19 cases in the United States in mid-June, which resulted in decreased consumption and deteriorating national economy," said Yusuke Uno of Sumitomo Mitsui Bank.
In addition, latest data reveals that US GDP contracted 32.9% y/y, which is a record for the entire history of observations.
The first quarter of 1958 was considered the worst before, during which the US GDP fell by 10%.
However, the current decline differs from the previous ones in terms that it was catalyzed by social distancing measures designed to slow the spread of COVID-19 in the United States. Such led to a slowdown in economic activity in the country.
Thus, it is assumed that if within the next two months, the coronavirus does not force US authorities to reintroduce strict quarantine restrictions, then US GDP for the third quarter will be better than the second.
Unfortunately, the recent surge in coronavirus has slowed the recovery of the US economy, so, in the third quarter, it is unlikely that recovery will be V-shaped.
As a result, the USD index fell 92.56 points, the lowest level since May 2018, after the US reported a record decline in national GDP.
"It is difficult to say whether the dollar has already reached the bottom. The US economy is still weak, and there is no clear prospect that the pandemic is soon to recede," said Akio Kato of Mitsubishi UFJ Kokusai Asset Management.
The huge sell-off of dollar increased EUR / USD above two-year highs around 1.1908. However, a correction is possible, especially if investors begin to revise their positions before the end of the month.
But, analysts at the Commerzbank note that the decreased demand in the US dollar is justified, and the correction of the EUR / USD pair is likely to be limited.
"The Fed's ultra-soft monetary policy, record low yields on US government bonds, Europe's more successful fight against coronavirus than the United States, and US President Donald Trump's proposal to postpone the US presidential election are the reasons why the dollar has weakened recently. Thus, the euro has the opportunity to reach a price value of $ 1.20," they said.
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