FOREX-Dollar extends gains, Aussie lags, euro backtracks from $1.20 high

LONDON, Sept 2- The dollar extended overnight gains on Wednesday and the euro fell, retreating from the key $1.20 level reached in the previous session, while the Australian dollar lagged behind after the country confirmed its is in a recession. The dollar strengthened overnight, helped by positive U.S. manufacturing data and technical factors.

* Dollar index rises after upbeat manufacturing data

* Aussie dollar falls after recession confirmed

* Euro falls back below $1.19

* Graphic: World FX rates in 2020 prices, adds commentary, updates throughout)

By Elizabeth Howcroft

LONDON, Sept 2 (Reuters) – The dollar extended overnightgains on Wednesday and the euro fell, retreating from the key$1.20 level reached in the previous session, while theAustralian dollar lagged behind after the country confirmed itsis in a recession.

The dollar strengthened overnight, helped by positive U.S.manufacturing data and technical factors.

It extended gains in early London trading, then stabilisedas the morning progressed, with the dollar index at 92.586 at1054 GMT, up 0.4% on the day.

Commerzbank analyst Thu Lan Nguyen said that, although thelong-term economic fallout from coronavirus is unknown, it iscountries’ relative economic performance that drives exchangerates – in addition to monetary policy developments.

“The U.S. dollar was able to benefit from significantlyimproved ISM data yesterday which suggest a continued high-speedrecovery, thus increasing the likelihood that the U.S. might beable to overcome the crisis comparatively better after all,” shewrote in a note to clients.

The euro fell, down 0.4% at $1.18645 at 1055 GMT,backtracking from the key $1.20 level it hit for the first timesince 2018 on Tuesday.

The euro has surged more than 10% since its low point inMarch and, although it was unmoved by Tuesday’s eurozoneinflation data being unexpectedly negative, investors tookprofits after European Central Bank chief economist Philip Lanesaid that the euro-dollar rate “does matter” for monetarypolicy.

“(Lane’s comment) shows that the ECB is not ignoring what ishappening on the inflation front,” said Kenneth Broux, FXstrategist at Societe Generale. “The risk is that if inflationundershoots the target, the stronger the euro becomes.

“It’s interesting because it shows the ECB’s being rattledby this incessant appreciation of the euro, or decline of thedollar,” he added.

“What I would expect now is a bit more euro profit-takingbefore the ECB meeting next week, because investors obviouslyare going to heed Lane’s comments now,” he said.

Investors will now be looking to see if the ECB will followthe U.S. Federal Reserve in shifting its policy towardsinflation, as it reviews its monetary policy, Broux said.

Along with the euro, the Australian dollar was a laggardamong G10 currencies, down 0.4% on the day at 0.7341 at 1108 GMT.

Worse-than-expected Australian gross domestic product dataconfirmed the country’s economy shrank 7% in the three months toJune, putting it in its first recession in nearly three decades.

The country was also hit on Tuesday by China’s suspendingbarley imports from Australia’s largest grain exporter, addingto tensions between China and Australia which, until recently,had left Australia’s agricultural products largely unscathed.

Risk currencies were little changed on the day: theNorwegian and Swedish crowns were down 0.1% versus the dollar, while the New Zealand dollar was broadly flat.

German retail sales fell unexpectedly, down 0.9% in July,missing a Reuters forecast for a 0.5% increase and counteringhopes that household spending could drive a strong recovery fromthe coronavirus shock.

The spread of COVID-19 continues to limit activity, withPoland set to ban direct flights from 44 countries, includingSpain, Israel and Romania.

In the United States, there remain “serious differences”between Democrats and the White House over proposed governmentaid.(Reporting by Elizabeth Howcroft; editing by ChristopherCushing, Larry King)