By Caitlin Ostroff 

Investors have sold the dollar and begun buying riskier currencies on optimism about an economic recovery as countries emerge from coronavirus lockdowns.

The ICE U.S. Dollar Index, which measures the greenback against a basket of currencies, hit its lowest level since mid-March on Monday, dropping as much as 0.5% before recovering somewhat. Currencies that tend to gain when risk appetite returns rose against the dollar, with the Australian dollar up 1% and British pound 0.3% higher.

Prospects for an economic recovery internationally have improved in recent weeks. Factories and schools are reopening in parts of Europe and Asia. The rebound in oil prices has also boosted petroleum exporting nations such as Russia and Mexico, both of whose currencies have risen strongly against the dollar over the past month. And the European Union proposed a recovery fund that will provide more grants than loans to the nations hit hardest by the coronavirus.

"Global growth isn't going to be nearly where it was in 2017, but some pieces of the puzzle are slowly falling into place," said Chris Turner, head of foreign-exchange strategy at ING Bank. "As confidence slowly returns, you can sort of drag some of that money out of super safe havens."

At the height of the stock-market selloff in March, investors sold other currencies and bought the dollar, which is seen as a safer asset due to its prominence in global finance. The dollar has benefited in recent years from higher interest rates and stronger growth than most developed economies. But with rates slashed, investors are increasingly looking to the rest of the world for returns, Mr. Turner said.

Investors see an upside to European growth after the EU proposed borrowing EUR750 billion ($821.6 billion) from capital markets to aid recovery from coronavirus pandemic -- a sign of regional cohesion. The proposal helped send the spread between the Italian and German 10-year government bond yields -- seen as an indicator of financial stress -- lower. The euro is up 1.5% against the dollar over the past month and traded slightly higher Monday, for $1.111.

"Certainly that news has been really lifting to the tone of the euro," said Jane Foley, head of foreign-exchange strategy at Rabobank. If the borrowing plan goes through, it "would be an enormous step forward," she said.

A wild card for the dollar is China. Some investors took solace that President Trump didn't impose tariffs on China following its move to impose national security laws on Hong Kong. Yet China has also guided its currency weaker against the dollar in recent weeks.

Should tensions between the U.S. and China escalate, analysts say the dollar could climb higher again. The potential for a resurgence in coronavirus infections and the worst civil unrest in decades in the U.S. could also drive investors to return to safer assets, Ms. Foley said.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

(END) Dow Jones Newswires

June 01, 2020 08:42 ET (12:42 GMT)

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