US dollar dips as sentiment recovers on vaccine hopes, big deals

The US dollar has dipped against riskier currencies as hopes for a COVID-19 vaccine and big corporate deals improved investor appetite for assets such as the Chinese yuan and the euro.

The yuan jumped to a 16-month high as a series of Chinese data points to steady economic recovery in China while the Australian dollar was bolstered by policy minutes from the country’s central bank which stopped short of signalling a further cut to the cash rate.

The US dollar index dipped to 92.910 on Tuesday, slipping further from a one-month high of 93.664 touched last Wednesday, with its low last week of 92.695 seen as an immediate support.

The euro inched up to $1.1889, having gained for five consecutive days, with an initial resistance seen at around last week’s high of $1.1917.

Against the safe-haven Japanese yen, the US dollar traded at 105.66 yen, having touched a two-week low of 105.55 yen on Monday.

Helping sentiment, AstraZeneca resumed British clinical trials of its COVID-19 vaccine, one of the most advanced in development while Pfizer Inc and BioNTech SE proposed expanding their phase three COVID-19 vaccine trial.

“It was uplifting that Pfizer has made clear a target of vaccines. As risk assets bounced back, the dollar has lost momentum,” said Kyosuke Suzuki, director of forex at Societe Generale.

Big corporate deals

Wall Street shares bounced back also as several multi-billion dollar deals – including Nvidia‘s purchase of chip designer Arm and a deal between Oracle and China’s ByteDance on TikTok– lifted confidence.

The Australian dollar gained 0.4 percent to $0.7316, as highly anticipated minutes from the central bank’s September monetary policy meeting gave no hint whether record low interest rates will be cut further.

The Chinese yuan rose to a 16-month high in both offshore and onshore trade, thanks to China’s robust economic fundamentals.

The country’s industrial output accelerated the most in eight months in August, while retail sales grew for the first time this year, suggesting the economic recovery is gathering pace as demand starts to improve more broadly from the coronavirus crisis.

“We have evidence of strong exports from China while Chinese tourists, who would have spent $260bn overseas in normal years, are not going abroad this year, reducing yuan selling,” said Ei Kaku, senior strategist at Nomura Securities.

“Chinese authorities have not tried to rein in the yuan’s rise for the past couple of weeks even as it has strengthened, leading people to expect further appreciation in the yuan.”

The yuan’s strength helped to lift MSCI emerging market currency index to a six-month high.

The British pound

The British pound bounced back to $1.2855, following a fall of 3.66 percent last week, showing limited reaction after the UK government won an initial parliamentary vote on its controversial bill to violate the Brexit deal with the European Union.

Still, traders said the currency looks vulnerable as the EU warns British Prime Minister Boris Johnson’s bill would collapse trade talks and propel the United Kingdom towards a messy Brexit.

Investors now look to central bank policy meetings in the United States on Wednesday, and in Japan and the UK on Thursday.

This week’s US Federal Reserve meeting will be its first since Chairman Jerome Powell unveiled a shift towards greater tolerance of inflation, effectively pledging to keep interest rates low for longer.

Projections from Fed policymakers that inflation will remain below 2 percent in their economic forecasts, to be extended to 2023 this time, could strengthen expectations that interest rates will stay low for a long period, analysts say.