The dollar fell against most currencies in choppy trading on Wednesday, as progress in battling the coronavirus pandemic with positive vaccine news and prospects of more U.S. fiscal stimulus lifted risk appetite and weakened the greenback.
Riskier currencies, including the Australian and New Zealand dollars as well as the Chinese yuan led gains against the dollar. Both the Aussie unit and Chinese currency hit 2-1/2-year peaks.
With U.S. coronavirus cases exceeding 15 million on Tuesday, regulators moved a step closer to approving a COVID-19 vaccine, while Britain started inoculating people on Tuesday.
Investors are also tracking negotiations over U.S. coronavirus aid, with the Trump administration proposing a $916 billion package on Tuesday after congressional Democrats rejected a slimmer plan.
“The narrative that the market is working off for now is that there would be a reflationary environment in the United States with the additional stimulus,” said Ranko Berich, head of market analysis at Monex Europe.
“So you have a Federal Reserve that’s signalling very clearly that it has a very dovish reactive function and would be very strongly accommodative. This environment overall is conducive to dollar weakness,” he added.
In mid-morning trading, the dollar was little changed to slightly lower against a basket of currencies at 90.88. It reached an April 2018 low of 90.47 last Friday.
The dollar’s losses have been most severe versus the euro in recent weeks as economic activity data suggested Europe is outperforming the United States.
The euro was flat to slightly higher against the dollar at $1.2101. It was on track for an annual gain of 8%, its largest since 2017.
German investor sentiment rose in December on expectations that vaccines against the coronavirus will boost the economic outlook, a survey showed this week.
The dollar dropped to 6.5198 yuan in onshore trading, its lowest since June 2018, putting the yuan up by more than 10% from its May lows, boosted by the softer dollar and steady inflows into Chinese stocks and bonds.
Sterling was volatile, up 0.6% against the dollar at $1.3417 before a Wednesday dinner between British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen in Brussels that is seen as a last-ditch attempt to salvage a Brexit trade deal.
“Bottomline, a Brexit trade deal is the likeliest outcome, although a complete collapse in talks cannot be ruled out,” said Monex’s Berich.
Rumblings in the money markets grew with swap markets indicating a growing demand for dollars heading into the end of the year. Three-month euro cross-currency basis swap spreads widened to minus 27 basis points, but were well below a March peak of nearly minus 90 basis points.
The Australian dollar rose to its highest since June 2018 against the greenback and was last up 0.9% at US$0.7472.
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saikat Chatterjee in London; Editing by William Maclean, Kirsten Donovan