The yen rose and the dollar was headed for its best week of the month on Friday, as surging coronavirus cases and stalled progress toward U.S. stimulus had investors seeking safe assets.
As fresh curbs to combat COVID-19 were introduced in Europe and Britain, the world's reserve currency surged to a two-week high of 93.910 against a basket of currencies. It held just below that peak in the Asia session.
The safe-haven yen crept back toward a two-week high it hit on Wednesday and last traded at 105.24 per dollar. The Australian dollar slipped 0.3% and other majors nursed losses.
London enters a tighter COVID-19 lockdown from midnight, which with a curfew in Paris leaves two of Europe’s largest cities living under state-imposed restrictions.
The U.S. Midwest is also battling record surges in new cases just as data shows the U.S. recovery losing steam and as stimulus plans bog down in a three-way negotiation between the White House, Senate Republicans and House Democrats.
“Markets fear a slowdown in activity as new virus cases rise,” ANZ bank analysts Susan Kilsby and David Croy said in a note.
“The deterioration is evident everywhere across Europe, which is a major blow to the recovery’s momentum and reinforces deflationary risks.”
Risk sensitive currencies have been hit hardest, with the Australian dollar, the kiwi and Norwegian krone leading weekly falls. The Norwegian krone is nursing a 2.5% loss this week, while the Aussie is down 2.3%.
Sterling was also heavily sold on Thursday on concerns about the obstacles keeping the European Union and Britain from reaching a Brexit trade deal. It has lost 1.1% this week and held at $1.2893 on Friday.
The EU has put the onus on Britain to compromise or stand ready for trade disruptions in less than 80 days. British Prime Minister Boris Johnson will respond and set out his approach to the talks on Friday.
The euro was flat in Asia on Friday but has lost about 1% for the week. The U.S. dollar was likewise steady and has gained 0.8% against a basket of currencies this week, its largest weekly rise since late September.
BEARISH AUSSIE, BULLISH YUAN
Asia’s standout movers for the week have been the Australian dollar and yuan.
The Aussie has fallen to the bottom of a range that has held it for several months after investors considered comments from the Reserve Bank of Australia governor mentioning rate cuts and bond buying as policy options, raising the chance of monetary easing.
“The comments have a ‘Jackson Hole’ feel about them,” Westpac economist Bill Evans said in a note, referring to the August speech from U.S. Federal Reserve Chairman Jerome Powell outlining a new and more accomodative approach to inflation.
“The conclusion from both speeches is that we can expect policy to remain stimulatory for even longer,” Evans said.
The yuan, meanwhile, has been resilient in the wake of a nudge lower from the People’s Bank of China. Last weekend the PBOC cut the cost of shorting the currency and has been gently edging the onshore trading band a bit weaker.
Yet, supported by strong bond market inflows and bets on a Joe Biden presidency ushering in more stable Sino-U.S. relations, the yuan has fallen just 0.4% in a week where dollar has jumped.
At 6.7139 per dollar in onshore trade, it is only a fraction shy of the 17-month high it made a week ago.
“The yuan has entered a massive bull channel, and USDCNH is on a max downtrend,” said Stephen Innes, strategist at brokerage Axi.
Reporting by Tom Westbrook; Editing by Sam Holmes and Jacqueline Wong