Dollar capped as U.S. leaders meet on stimulus, pound underpinned by Brexit deal hopes

The new £1 pound coin is seen alongside U.S. dollar bills and euro notes on April 4, 2017, in Bath, England.
Matt Cardy | Getty Images

The dollar languished near 2-1/2-year lows on Wednesday as progress toward a massive U.S. government spending bill and Covid-19 relief measures whetted risk appetite, sapping demand for the safest assets.

Also supporting sentiment, the U.S. expanded its roll-out of a vaccine from Pfizer Inc and German partner BioNTech SE, while another developed by Moderna appeared set for approval this week.

The British pound held on to more than 1% of gains made on Tuesday following a report that an elusive Brexit trade deal may now be close, even as British Prime Minister Boris Johnson repeated that the most likely outcome of talks was no deal.

The dollar changed hands at $1.2188 per euro, near the 2 1/2-year low of $1.2177 touched on Monday. It traded at 103.44 yen, dipping 0.2% on Wednesday.

The pound was last at $1.3534 to trade around its highest level since 2018, following a 0.9% jump in the previous session.

"Because of all the positives that have hit the market, from vaccines to stimulus, we're seeing dollar weakness across the board," said Bart Wakabayashi, Tokyo branch manager of State Street Bank in Tokyo.

"There's a feel good momentum in the market."

Top U.S. congressional leaders began a second meeting on Tuesday to finalize $1.4 trillion in spending and end a standoff on coronavirus relief, after signaling optimism following their first gathering.

Investors are also keeping an eye on the outcome of a two-day Federal Reserve policy meeting on Wednesday. Policymakers are expected to keep the key overnight interest rate pinned near zero and signal it will stay there for years to come, a decision that analysts say will further boost investors' risk sentiment.

Many analysts also expect new guidance on how long the Fed will keep up its massive bond-buying program.

"The focus is whether the Federal Reserve will extend the duration of bonds it buys. I think the chance of the Fed doing so is relatively low and that we could see the dollar bouncing back if the Fed avoids that," said Yujiro Goto, chief FX strategist at Nomura Securities.

The dollar index, which measures the greenback against a basket of currencies, was last at 90.23, after sinking as low as 90.419 on Monday, a level not seen since April 2018.

With its former support level of 91 now acting as a resistance, the index could head to as low as 88, said State Street's Wakabayashi. It hit a three-year low of 88.251 in February 2018.

"If we get some momentum to the downside I think we'll start talking about 88 as the next level that. Although far away, I think that's in play," he said.