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Home Forex

Dollar extends four-month high against euro as recovery outlooks diverge

by admin
March 28, 2021
in Forex
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Dollar extends four-month high against euro as recovery outlooks diverge
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The dollar hit a fresh four-month high against the euro on Thursday as the US pandemic response continued to outpace Europe’s, which has been hobbled by extended lockdowns and delayed vaccine rollouts.

The safe-haven greenback held on to most of a broad two-day advance, which has been fuelled by worries ranging from Europe’s third Covid-19 wave and potential US tax hikes to the persistent spectre of inflation. Even Germany’s reversal of a call for a strict lockdown over the Easter period did little to build confidence in the region’s economic outlook, instead compounding discontent with Chancellor Angela Merkel’s handling of the pandemic.

“The weak point in Europe remains around the vaccine rollout amid the rise in new virus cases and the tightening of restrictions … which likely means the mooted acceleration in Q2 may have to be pushed back by a quarter,” Tapas Strickland, director of economics and markets at National Australian Bank, wrote in a client note. “The narrative of the US outperforming Europe in the coming quarter remains.”

The euro traded near the four-month low of $1.1809 touched earlier in the Asian session, while a gauge of the dollar against six major peers hovered just below a four-month high of 92.617 reached overnight. The dollar gained 0.2 per cent to 108.905 yen, another safe-haven currency, as the pair continued to consolidate below 109.

At the same time, the dollar’s rally showed some signs of fatigue, as some of its bruised rivals recovered from lows amid gains in many Asian equity markets. Australia’s dollar, considered a liquid proxy for risk appetite, bounced 0.3 per cent after earlier dipping to $0.7579, the lowest level since February 2.

The British pound rose 0.2 per cent, climbing out of a six-week trough at $1.3675. Meanwhile, benchmark 10-year Treasury yields consolidated around 1.6 per cent, a week after hitting a more than one-year top of 1.754 per cent, which had also supported the dollar.

“The US longer-term Treasury yield is lower than the previous week’s level, and that is a very big factor for the improvement in market sentiment,” said Minori Uchida, chief currency analyst at MUFG Bank. “Even if the yield is 1.6 or 1.7 per cent, it is not enough to push up the dollar constantly.”

On Wednesday, US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell expressed their confidence in the US recovery during a second day of testimony to Congress. Yellen told Senate lawmakers she was open to banks buying back stock and paying dividends, an updated view showing her confidence in the economy. Powell also said he thinks 2021 will be a “very, very strong year in the most likely case.”

A day earlier, though, the treasury secretary had put investors on alert after espousing tax hikes to pay for US President Joe Biden’s plans for upgrading infrastructure and other investments. Inflation could also rear its head as disruptions in the supply chain exert cost pressures for manufacturers, with US factory activity picking up in early March.

Meanwhile in Europe, an unexpected expansion of business activity did little to brighten the mood, with renewed Covid-19 lockdowns in many of the bloc’s member nations meaning the gains may not last through April.

Concerns have been magnified because the third wave of infections is largely driven by the UK strain of the virus, according to Commonwealth Bank of Australia strategist Kim Mundy.

“The risk is that the more contagious and deadly strain of the virus elicits a stronger response from European governments, which sees Europe remaining locked down for longer,” she wrote in a note. “A significant delay to Europe’s re-opening efforts will only widen the divergence between the economic outlook in Europe and the US,” putting additional pressure on the euro, she said.

In cryptocurrencies, bitcoin continued to swing widely, falling below $52,000 again in early Asian trading before recovering to around $52,123. That is after briefly topping $57,000 overnight after Tesla Inc boss Elon Musk said customers can now buy the company’s electric cars with the digital token. Bitcoin hit a record high of $61,781.83 on March 13.

Tags: crude oildivergedollardollar valueeuroEuropeextendsfourmonthhighlockdownoutlooksrecoveryv ha
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