Dollar falls on rising euro, higher US stocks

NEW YORK: The dollar fell in North American trade on Tuesday as the euro rose on optimism about the possibility of a European Union stimulus package and as US stocks gained.

The US dollar index, which measures the safe-haven greenback against a basket of six rival currencies, was down 0.31% to 96.265. The weaker dollar was partly attributable to a move higher in the euro on hopes the European Union will agree on a rescue financing package that will limit the economic damage to the bloc from the coronavirus pandemic. The euro was up 0.47% at $1.139.

The European Union's approval of its recovery fund may see the euro test $1.150 with a break leading to a test of crucial resistance levels around $1.180.

"Market consensus has shifted towards the euro on the assumption that euro area will suffer less economic damage and that a large rescue package will be approved," said Karl Schamotta, chief market strategist at Cambridge Global Payments.

"History would suggest that market participants shouldn't get their hopes too high around a rescue package. Ultimately it is likely to be smaller and more diluted than what is on the table right now."

The S&P 500 index was higher on Tuesday morning, despite having started off the day in the red. US stock indexes initially fell after three banks - JPMorgan, Wells Fargo and Citigroup - reported mixed earnings.

"The correlation between equities and foreign exchange have strengthened substantially in the last month," said Schamotta.

"Market consensus is shifting against the dollar and it does look as if traders are looking for any opportunity to sell dollars and pick up currencies with greater appreciation potential."

But although Refinitiv data suggests second-quarter results will show the second-biggest quarterly drop in corporate earnings since 1968, investors maintain some degree of confidence in the US consumer.

US consumer prices rebounded by the most in nearly eight years in June, according to consumer price index data from the Labor Department released Tuesday, but a resurgence in new COVID-19 cases after the reopening of businesses suggests a moderation in demand that could keep inflation muted and allow the Federal Reserve to keep injecting money into the ailing economy.