Currencies

Dollar loses some bounce as focus shifts to Fed

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Key Points
  • The risk-sensitive Australian and New Zealand dollars edged higher, with the Aussie up 0.3% and the kiwi up 0.5%. The euro rose 0.3%, though all three currencies remained below where they sat before Monday's dollar bounce.
  • Sterling crept higher as traders clung to hopes for a Brexit trade deal before the year's end and the yen edged down to a week low as equities rose with the broadly upbeat mood.
  • Against a basket of currencies the dollar was a fraction softer at 91.825, after struggling to find traction above 92.000 on Monday.
U.S. dollar banknotes.
Liu Jie | Xinhua via Getty

An under pressure U.S. dollar handed back part of its month-end bounce on Tuesday, as investors reckoned on more monetary easing by the Federal Reserve and a gathering recovery elsewhere.

The risk-sensitive Australian and New Zealand dollars edged higher, with the Aussie up 0.3% and the kiwi up 0.5%. The euro rose 0.3%, though all three currencies remained below where they sat before Monday's dollar bounce.

Sterling crept higher as traders clung to hopes for a Brexit trade deal before the year's end and the yen edged down to a week low as equities rose with the broadly upbeat mood.

Investors are heavily short dollars as optimism about promising vaccine trials drives buying of riskier currencies and higher yielding assets outside the United States.

Even worries about rising coronavirus cases have not offered too much support to the greenback, as speculation grows that the Federal Reserve might act to support the economy through a tough winter before vaccinations can turn the tide on the pandemic.

"There's a general view that there'll be something in the December meeting ... given there's no real fiscal development in the last few months," said BNZ senior markets strategist Jason Wong.

The Fed meets to set policy on Dec. 15 and 16, though before then – on Tuesday and Wednesday – Fed Chair Jerome Powell will appear before Congress and his remarks will be closely watched for any clues as to the next moves.

The policymakers gather as authorities mull approving two effective vaccines, developed by Pfizer and Moderna for distribution, while at the same time surging virus cases have put the brakes on the U.S. economic recovery.

Powell, in prepared remarks released on Monday, said a "challenging" few months lie ahead and that it is difficult to assess the economic implications of vaccine developments yet.

"A full economic recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities," he said.

Against a basket of currencies the dollar was a fraction softer at 91.825, after struggling to find traction above 92.000 on Monday.

Elsewhere in Asia, the Chinese yuan was back on the front foot – holding firm onshore and snapping three sessions of losses in offshore trade after decade-high factory activity growth figures underscored China's remarkable recovery.

It last traded at 6.5751 per dollar onshore.

The Reserve Bank of Australia, meanwhile, left policy settings unchanged on Tuesday, as expected.

Governor Philip Lowe's statement was cautiously optimistic but said it would take until the end of next year for gross domestic product to recover 2019 levels and emphasized that the rebound's momentum depended on policy support.

European inflation figures and U.S. manufacturing data is due later on Tuesday.

Britain and the European Union also warned each other on Monday that time was running out to reach a Brexit trade deal, though investors remain hopeful and have kept the pound at $1.3361 and 89.46 pence per euro.

Talks between EU chief negotiator Michel Barnier and British chief negotiator David Frost are ongoing and the EU team are expected to stay in London for two or three more days.

"Further talk that we could see a deal in the next few days makes shorting the pound tough," said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

"Although once we get a deal, and assuming it does play out, then sterling may offer some good shorting opportunities as it turns less political and stands out as a funding currency – the fiscal situation makes for some incredibly sobering reading."

Bitcoin was down about 2% and, at $19,354, just below a record high of $19,864 hit on Monday.