FX, Dollar Near Multi-Year Lows; Stimulus Talks and Fed Eyed

By Peter Nurse

Investing.com - The dollar remained near multi-year lows in early European trade Tuesday, with little news to challenge a dominant narrative that sees loose U.S. policy underpinning a broad global recovery next year.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was largely flat at 90.688, after sinking as low as 90.419 on Monday, a level unseen since April 2018.

USD/JPY fell 0.1% to 104.06, EUR/USD edged lower to 1.2140, trading near a 2 1/2-year low of 1.2177 touched on Monday, while the risk-sensitive AUD/USD was down 0.2% at 0.7523, after touching the highest since June 2018 at 0.7578 on Monday.

New coronavirus stimulus to help ailing businesses and households is still struggling to get through Congress, but lawmakers are now talking about splitting the $908 billion stimulus bill into two parts, in order to make it easier in theory for some of it to get through.

The first part will include a $748 billion proposal that has bipartisan support including aid for vaccine distribution and unemployed benefits, and the other, more controversial, is a $160 billion bill for state and local support and temporary Covid-19 liability protection.

Congress goes on recess on Friday, so time is limited.

The Federal Reserve starts its final policy-setting meeting of the year later Tuesday, to be concluded Wednesday, with expectations growing that the central bank will increase its bond-buying program as Congress dithers and Covid-19 cases increase, prompting more lockdowns.

Additionally, “the Fed is annoyed with Steve Mnuchin’s decision to veto against the prolongation of the crisis measures and this is maybe the best reason to expect the Fed to add stimulus via a Twist operation despite several FOMC-members acknowledging a brighter medium-term outlook,” said Nordea analyst Andreas Steno Larsen, in a research note.

Elsewhere, GBP/USD rose 0.1% to 1.3331, retaining some strength after better than expected unemployment data.

Additionally, European Union negotiator Michel Barnier said that sealing a trade pact with Britain was still possible, after talks were extending past Sunday’s self-imposed deadline in order to try and strike a Brexit deal.

If a trade agreement isn’t struck by the end of the year, free movement of goods, services, people and capital between the two zones will come to an abrupt end, potentially affecting around $1 trillion in annual trade.

“FX positioning data shows a substantial trimming of GBP net shorts, but it doesn't reflect the shift to a more pessimistic market situation on Brexit. Even if some GBP shorts have been rebuilt in the last few days, the positioning will hardly provide a buffer in the case of no-deal,” said ING’s Francesco Pesole, in a research note.

The Times of London reported that the two sides had made progress on the issue of the 'level playing field' as regards regulatory standards, leaving fishing rights as the biggest obstacle to a deal.