Dollar Weaker As U.S. Fiscal Stimulus Hopes Lift Risk Appetite

The dollar was on the defensive against most currencies on Tuesday as rising optimism that U.S. lawmakers could agree on new stimulus to blunt the economic impact of the coronavirus dampened demand for safer assets.

Risk appetite also improved after U.S. President Donald Trump left hospital and returned to the White House following treatment for COVID-19, a development viewed as reducing political uncertainties in the near term.

The lead taken by Trump’s presidential opponent Joe Biden in electoral polls ahead of next month’s election is also seen as negative for the U.S. currency.

“The increasing possibility of a “blue wave” (Democrat control of the White House and Congress) that would open the door for much-needed fiscal stimulus would be a welcome development for risk assets and could undermine the U.S. dollar,” said Lee Hardman, currency analyst at MUFG.

An index which measures the dollar against a basket of currencies was down slightly at 93.39. It has fallen 1.2% from a two-month high reached at the end of September, in contrast with U.S. equity markets, which rose.

Euro/dollar was trading up 0.1% at 1.1792.

The British pound also rose 0.1%, to $1.2991, with hopes that a Brexit deal can be reached pushing the currency towards $1.30.

The dollar was 0.1% weaker versus the Japanese yen at 105.65.

U.S. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin spoke by phone for about an hour on Monday on coronavirus economic relief and were preparing to talk again on Tuesday, continuing their recent flurry of activity working towards a deal on legislation.

White House Chief of Staff Mark Meadows said there was still potential for an agreement among lawmakers in Washington on more economic relief, and that Trump was committed to getting the deal done.

However, renewed efforts in Congress to reach an agreement on relief funds for the pandemic-hit economy has been complicated by the spread of the coronavirus among key policymakers including Trump.

The president returned to the White House on Monday after a three-night hospital stay for COVID-19 treatment, though White House physician warned he may not be out of the woods yet.

“The market has been nervous about the possibility of a contested election, but it appears Biden is widening the lead, thus reducing the chance of markets not knowing the results for a long time,” said Yujiro Goto, chief currency strategist at Nomura Securities.

“And while markets have thought there will be corporate tax hikes if Democrats sweep both chambers as well as the presidency … that is being offset by the idea that there will be fiscal stimulus,” he added.

Among currencies that are not included in the dollar index, the offshore Chinese yuan weakened 0.2% to 6.7296 per dollar, having hit on Monday its highest level since April last year.

The Australian dollar reversed the gains it made after the Reserve Bank of Australia kept interest rates on hold at 0.25%, despite widespread expectations of a rate cut. It was last trading hands at 0.7150, down 0.4% on the day.

Currency traders are also focused on the government’s annual budget, with Canberra widely expected to keep the fiscal tap open for years to come.

– Reuters