Hopes for U.S. stimulus breakthrough push dollar to lowest in more than six weeks

October 21, 2020

LONDON (Oct 21) - The dollar extended its losses on Wednesday, hitting its lowest in more than six weeks, after U.S. President Donald Trump boosted hopes for a large fiscal stimulus package, prompting some traders to ramp up bets on riskier currencies.

Lawmakers in Washington have been negotiating intermittently since August, with Democrats arguing for a bigger package to help manage the economic fallout from coronavirus.

Trump raised hopes for a breakthrough on Tuesday by saying he was willing to accept a large aid bill, despite opposition from his own Republican party.

The dollar fell in response to the comments, even though markets generally expect more fiscal stimulus to be passed in the near future regardless of whether it is agreed before the election.

“It’s not a gamechanger – I think the base scenario for the market is that there will be another fiscal stimulus package at some point in the next few weeks or maybe in a few months,” said Thu Lan Nguyen, FX and EM analyst at Commerzbank.

“The market has still reacted positively to it because obviously the earlier the better in the current situation.”

At 1102 GMT, the dollar was down 0.3% against a basket of currencies, at 92.733 =USD, having hit a low of 92.685 earlier in the session.

Nguyen said that the day's currency market moves were not typical "risk-off" moves, as the safe-haven Japanese yen was up around 0.5% against the dollar, close to one-month highs, at 104.845 JPY=EBS.

Rather, the hopes for fiscal stimulus caused dollar weakness because it boosted long-term inflation expectations for the United States, she said.

“Normally if you have higher inflation the currency appreciates because the market expects higher interest rates. That is not the case for the U.S. at this point any more ... the Fed now wants higher inflation - it’s not going to raise interest rates automatically if inflation’s a little bit higher,” she said, referring to the U.S. Federal Reserve’s policy shift to tolerate higher inflation.

The riskier New Zealand and Australian dollars both advanced, with the Kiwi up 0.8% and the Aussie up 0.6% versus the dollar by 1107 GMT NZD=D3AUD=D3.

The Norwegian crown reached a one-week high of 9.19625 versus the U.S. dollar NOK=D3, and the Canadian dollar rose to its strongest in more than six weeks, touching 1.3081 per dollar CAD=D3.

The euro rose to a one-month high versus the dollar in early trading and was up 0.3% at $1.18575 at 1108 GMT EUR=EBS.

China’s yuan surged, in both offshore and onshore trading, led by firmer central bank guidance and recent data suggesting a more sustained recovery in the world’s second-largest economy.

The offshore yuan reached its strongest in two years versus the U.S. dollar towards the end of the Asian session at 6.6278 before easing somewhat. By 1108 GMT, it was up 0.4% at 6.6393 CNH=EBS.

Elsewhere, sterling jumped to as high as $1.3071 after the European Union's chief negotiator said that a Brexit deal with Britain was "within reach" GBP=D3.


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