Dollar holds its ground as investors await U.S. stimulus talks
The dollar held overnight gains on Tuesday following seven weeks of an almost relentless fall as investors clung to hopes of a bipartisan stimulus deal in Washington and U.S. bond yields rebounded from multi-month lows.
The dollar index jumped back to 93.568 USD= from Friday’s two-year low of 92.495. Having fallen for seven straight weeks, the currency was due for a short-term corrective bounce, traders said.
“The dollar’s decline appears to have come to a halt for now. Although talks on fiscal spending are locked in a stalemate, we are at least avoiding a complete cutoff of extra jobless benefit,” said Minori Uchida, chief currency analyst at MUFG Bank.
U.S. President Donald Trump on Saturday signed executive orders restoring part of enhanced unemployment payments and suspending payroll taxes.
“Compared to market consensus of a stimulus deal worth $1 trillion-$1.5 trillion, economic boosts from the announced measures would be clearly smaller,” said Takafumi Yamawaki, head of Japan rates and FX research at JPMorgan.
“Looking at market reactions, investors appear to think that there will be some sort of deal eventually,” JPMorgan’s Yamawaki.
U.S. congressional leaders and Trump administration officials said on Monday they were ready to resume negotiations on a coronavirus aid deal, although it was unclear whether Democrats and Republicans would be able to bridge their differences.
On Monday, the S&P500 index .SPX rose to a five-month high while the yield on 10-year U.S. Treasuries rose to as high as 0.581% US10YT=RR, its highest level in more than a week.
Investors are also keeping an eye on the rapidly deteriorating relationship between Washington and Beijing.
China imposed sanctions on 11 U.S. citizens, including Republican lawmakers, following Washington’s sanctions on Hong Kong and Chinese officials.
U.S. Treasury Secretary Steven Mnuchin said companies from China and other countries that do not comply with accounting standards will be delisted from U.S. stock exchanges as of the end of 2021.
While the market has shown limited response to the latest salvos, analysts say the confrontations have longer term implications.
“What used to be a dispute over trade has now evolved into something about ideology,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
“On the whole, the U.S.-China tensions could lead to dollar selling but the negative impact will not be limited to the U.S. Stagnant trade between them could hurt the (global) economy.”
Elsewhere, the Turkish lira stayed near a record low hit on Friday on concerns about the country’s depleting foreign reserves, leading to expectations that the central bank may take more decisive action to stem its fall.
The lira was quoted at 7.340 per dollar TRYTOM=D3, just above Friday’s record low of 7.365.
With more wild swings in the Turkish currency expected, implied volatilities, calculated from option prices, have soared, with three-month volatility TRY3MO= rising to 23.6%, its highest since April last year.
Rikiya Takebe, senior strategist at Okasan Online Securities, said “the lira will probably face a storm or two,” as Turkey’s central bank will likely intervene in the currency markets ahead of its meeting next week.
“Investors might grow wary of capital flight in a government-controlled market, which may also prompt them to sell the lira for dollars, yen or euros,” he said.
Separately, Bank of England Deputy Governor Dave Ramsden said in an interview published on Tuesday that the central bank will step up quantitative easing (QE) if the British economy slows again.
The British pound hardly budged at $1.3085 GBP=D4.