Tue, October 04, 2022

Dollar Down Amid Vaccine, Stimulus Optimism

US dollar banknotes

The dollar continues to head south in early European forex trade on Thursday. The prompting risk-on trades is caused by optimism over the rollout of vaccines and talk of new U.S. fiscal stimulus.

At 3:55 AM ET (0755 GMT), the Dollar Index was down 0.2% at 90.925. It was trading around levels last seen well over two years ago.

EUR/USD edged up 0.1% to 1.2124, at levels not seen since April 2018. This was despite the European Central Bank expecting to enhance its quantitative easing next week. 

USD/JPY was down 0.1% to 104.38, while the risk-sensitive AUD/USD climbed 0.2% to 0.7428. This has been, so far, its highest level in more than two years.

Optimism over U.S. stimulus talks and an expected roll-out of vaccines lead traders to take bets on global growth. Thus riskier currencies committed to keeping rates low for years. This is at the expense of the world’s reserve currency, particularly with the Federal Reserve, the safe-haven dollar.

This downward move in the dollar has occurred despite the latest employment data showing a slowdown in the jobs recovery. The monthly ADP report showed the growth of private payrolls was at their slowest pace since July in November.

The weekly initial jobless claims data will be scrutinized later Thursday. This is to see if they provide a similar picture ahead of Friday’s official employment report.

Analysts at ING, said in a research note, that data is clearly playing the second fiddle to vaccine and stimulus news. Markets may retain a positive stance on the latter for now as bipartisan talks resume.  It’s giving further support to risk assets and reinforcing the bearish dollar argument. 

Brexit Trade Deal Talks

Elsewhere, GBP/USD gained 0.2% to $1.3385. It remained close to a three-month high. 

Sterling received a boost Wednesday as the U.K. authorized a coronavirus vaccine developed by Pfizer and BioNTech. The U.K. said it would start giving shots to those most at risk early next week. The focus, however, remains on the Brexit trade deal talks.

On Wednesday, France warned it could veto a trade deal between the U.K. and the European Union. That is if it doesn’t like the terms of the deal. This puts pressure on EU negotiator Michel Barnier not to give too much ground.

The number of short bets against the sterling has increased over the past month. This was according to data by the U.S. Commodity Futures Trading Commission. It suggests the downside potential is quite large, should the two sides fail to agree on a deal.

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