Currency traders scooped up riskier currencies and bonds at the expense of the safe-haven US dollar on Tuesday, after Washington’s lawmakers pushed forward with an enhanced Covid-19 relief package.
The House of Representatives voted on Monday to more than triple stimulus payments to Americans, to $2,000 from $600,sending the plan on to the Senate for a vote.
The euro and pound also strengthened as London reopened after its Christmas break still digesting the Christmas Eve EU-UK trade deal that, although not comprehensive, had avoided a damaging no-deal outcome.
Euro bulls pushed the single currency up to $1.2235,also buoyed by talk of a EU-China trade pact. The pound was back above $1.35 as the FTSE surged. The dollar index was down 0.3% near the lows of April 2018.
“Overall, the US large basic balance of payments deficit points to a weaker USD and valuation suggests there is plenty of room for the USD to adjust lower,” Elias Haddad at Commonwealth Bank of Australia (CBA) in London wrote in a note.
Data released by the Commodity Futures Trading Commission on Monday showed traders increased bets against the dollar in the week ended Dec. 21 to $26.6 billion. That was the highest in three months, according to Reuters calculations.
Sterling long positions grew before the trade deal, the figures also showed, though the next set of data will reveal whether speculators “sold the fact”.
Sterling rose 0.3% to $1.35 following a two-day dip. It was as high as $1.3625 this month, a level unseen since May2018, but investors have taken some profits since the Brexit trade deal was struck.
Nick Nelson, head of European Equity Strategy, said the firm’s FX strategists were targeting GBP/USD $1.44 by the end of 2021. That would leave it just 4% below where it was at the start of the 2016 Brexit vote year.
Bart Wakabayashi, Tokyo branch manager of State Street Bank and Trust said, however, “nothing has really been agreed (between the EU and London) on financial markets, and that’s a big negative for the UK.”
Financial services contribute about 7% of the UK’s economic output, and roughly 43% of UK financial services exports goes to the EU, CBA’s Haddad pointed out. CBA sees the pound rising to$1.40 over the “next few months”.
Other currencies also rose. The Australian dollar gained0.3% to 76.035 US cents. Its New Zealand counterpart added 0.5% to 71.35 US cents.
The Chinese yuan gained 0.2% to 6.5192 per dollar in the offshore market. It changed hands onshore at 6.5310 per dollar while other emerging-market currencies,including the Korean won, Mexican peso and South African rand, were also higher.
There was turbulence in the crypto currency markets. XRP the third-biggest digital currency, slumped by over a fifth to its lowest since July after Coin-base, a major US virtual coin exchange, said it would suspend XRP trading.
The move came after US regulators charged Ripple, a block-chain firm associated with XRP, with conducting a $1.3 billion unregistered securities offering. Ripple has denied the charges.
Bitcoin slipped 1% to $26,857, continuing its retreat from the record high of $28,377.94 it had set on Sunday.
In the bond markets, benchmark German 10-year government bond yields sank another basis point to -0.57%,outperforming 10-year Treasury yields, which were fractionally higher at 0.945% after a US bond auction.
British two-year government bond yields fell to a record low of -0.170 after the Brexit deal, as UK coronavirus cases continued to spike. Yields on 10-year southern European bonds – deemed riskier with lower credit ratings – also fell.