Dollar Holds Gains As Investors Temper COVID-19 Vaccine Enthusiasm

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The dollar held broad gains on Thursday as investors tempered bullish expectations about a COVID-19 vaccine, while the kiwi hovered at an almost 20-month peak as the odds lengthened on New Zealand imposing negative interest rates.

The dollar index was steady through the Asia session and has added about 0.8% this week, mainly thanks to heavy selling in haven currencies such as the Swiss franc and Japanese yen, and weakness in the euro as COVID-19 cases surge in Europe.

Sterling also nursed losses as trade talks between Britain and the European Union seemed set to drag on past yet another deadline, raising the prospect that no trade deal is reached before Brexit transition arrangements end on Dec. 31.

The moves have put the brakes on a long a precipitous drop for the world’s reserve currency, which shed about 10% against a basket of currencies between March and the announcement of Pfizer’s working COVID-19 vaccine on Monday.

“I think we had a speculative market that was increasingly comfortable being short U.S. dollars,” said National Australia Bank’s head of foreign exchange strategy, Ray Attril.

“Then we had the vaccine news and a big spike in U.S. bond yields, which I think just acted as a little bit of a check on unbridled U.S. dollar bearishness,” he said.

The yen, a popular vehicle for bets against the dollar is now, at 105.28 per dollar, some 2% below an eight-month high it hit against the greenback last week, when Joe Biden’s lead in the U.S. election spurred a wave of dollar selling.

The euro, itself heavily loaded with short bets against the dollar, was kept under $1.18 and also weighed by Germany’s economic advisers cutting 2021 growth projections.

“On the relative macro front, Europe is still on a weaker footing compared to U.S.,” said OCBC Bank strategist Terence Wu, who believes the dollar’s decline is running out of steam.

“We also view the resilience in the Australian dollar with some skepticism, and look to turn short on the Aussie if there are signs that equities are losing steam.”

Resistance to the dollar’s strength in the Antipodes has been led by the kiwi, which added a whisker to Wednesday’s rise as the central bank’s tone has traders less convinced that negative rates are a sure thing anymore. [NZD/]

Rates markets moved sharply across the curve to price longer odds on that possibility on Wednesday, and yields inched higher on Thursday as the kiwi hit an almost 20-month top of $0.6915.

“Less stimulus is required than we thought in August, butstill a substantial amount of stimulus,” RBNZ Assistant Governor Christian Hawkesby told Bloomberg in an interview.

ANZ Bank still thinks New Zealand rates head below zero in August 2021, but said it’s now “become a bit of a toss up” and that it is clear that going negative is no longer urgent.

A risk averse mood which spilled over from equity markets through the Asia session kept a lid on further gains, though, and pushed the Aussie down marginally to $0.7272.

Along with the virus, U.S. President Donald Trump’s refusal to concede defeat in the election is also beginning to jangle investor nerves.

“Market participants appear to assume recounts and legal challenges are the only avenues for President Trump to remain in office,” said Commonwealth Bank of Australia analyst Joe Capurso.

“However, there are other pathways,” he said, such as Republican state legislatures sending separate delegates to cast electoral college votes in Trump’s favour, or for “faithless electors” to ignore the ballot box outcome.

“We expect the dollar to jump sharply, by at least 5%, if President Trump does find a way to stay in office.”

– Reuters

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