The US dollar weakened in early European trade Thursday, with signs of recovery in Europe which increased risk sentiment despite rising tensions between the US and China. The Dollar Index, which tracks the greenback against six other currencies, was down 0.1% at 94.808, still around a four-month low. 

Elsewhere, USD / JPY was mostly flat at 107.09, GBP / USD was flat at 1.2731, while EUR / USD was up 0.2% at 1.1587, after reaching 1.1593, 21-month highs. Helping the strengthening of the euro is a survey of German Gfk consumer confidence that came in better than expected early Thursday, showing that Europe's largest economy is on the path to recovery.

The forward-looking consumer sentiment index rose to -0.3 in August, better than -5 expected, and -9.6 seen in July. It has gained almost 23 points since its lowest point of minus 23.1 points in May. This came after European Union leaders agreed to a substantial stimulus plan to help the region rebuild from the damage caused by the Covid-19 pandemic. 

However, there is a danger in a risky tone. Tensions have risen between the two largest economies in the world, with the United States ordering China to close its consulate in Houston amid spy charges.

Dollar Falls During American Trading Session

An analyst said in a research note that investors could turn defensive on Thursday with market players likely to await retaliation from China. Attention will also be paid to the release of weekly initial jobless claims data at the beginning of the US session after last week's release saw improvements in the US labor market since April.

The dollar fell in the American trading session on Tuesday as inflation expectations increased slightly and the euro rose amid optimism about a possible EU stimulus package. The US dollar index, which measures the safe-haven greenback against six rival currencies, was down 0.29% at 96.271.

US consumer prices rebounded the most in almost eight years in June, according to a Labor Department report released Tuesday. The increase, which ended in three consecutive months of decline, was driven by a 12.3% surge in gasoline prices after falling in the first five months of the year.

However, analysts argue that evidence of inflation is better seen in indicators other than the consumer price index. The head of market strategy at Cambridge Global Payments Karl Schamotta said if there is a possibility in printing the CPI to actually reduce inflation in the US economy.

Causes of Weakening Dollars in the Market

Investors have bought the Treasury Inflation-Protected Securities (TIPS) to ensure inflation, is expected to increase due to large stimulus measures for the coronavirus taken by the Federal Reserve and the Ministry of Finance.

Inflation-adjusted yields on the 10-year TIPS have been trading with negative results since the end of March and now at minus 0.797%, close to the lowest level of all time. Head of FX North America strategy Daniel Katzive at BNP Paribas also said that because the economy has recovered even a little, inflation expectations have also recovered and nominal yields have been limited.

Which could change the tangible negative results and could endanger the dollar. The weakening of the dollar is also partly due to higher movements in the euro in hopes the European Union will approve a rescue financing package that will limit economic damage to the bloc of the coronavirus pandemic. 

The euro was up 0.44% at $ 1,139. Schamotta also said that there was an assumption that if the European region would suffer less economic damage and there would still be a large rescue package to be approved because there had been a shift in market consensus towards Europe. 

In addition, the addition of victims of corona virus cases in the United States itself continues to increase sharply, this is also very influential on the movement of the US dollar.