The dollar edged higher, while sterling dropped
The dollar edged higher in choppy trading, taking a breather from a sell-off that took it to its lowest level in more than 2-1/2 years last week, while sterling slipped as investors awaited the outcome of Brexit trade-deal talks.
So far this year, the dollar was down nearly 6%, on pace for its weakest yearly performance since 2017.
The monetary and fiscal stimuli we’re seeing is going to reflate the world and that leads to a weaker dollar and should be good for risk and emerging market currencies, said Axel Merk, president and chief investment officer at Merk Investments, which oversees $1 billion in assets.
Positive vaccine news from Johnson and Johnson and Pfizer Inc on Tuesday supported equities and lifted risk appetite, but the dollar held its own.
Upbeat economic sentiment data from Germany lifted the euro earlier in the session, but it was last flat to slightly lower at $1.2104.
German investor sentiment soared more than expected in December on expectations that vaccines against the coronavirus would boost the outlook for Europe’s largest economy.
The ZEW economic research institute said its survey of investors’ economic sentiment moved up to 55.0 from 39.0 in the previous month. A Reuters poll had forecast a reading of 45.5.
So far this year, the euro has gained roughly 8% versus the greenback.
Dominic Bunning, head of European FX Research, at HSBC wrote in his latest research note, that the euro’s strength, which has been more aggressive than in the summer, could be problematic for the European Central Bank.
A stronger currency tightens financial conditions, which is incredibly unhelpful for an economy facing persistent disinflationary pressures, Bunning said.
The ECB holds its monetary policy meeting on Thursday.
Investors, meanwhile, continued to focus on Brexit trade deal talks.
With only three weeks to go for Britain to fully complete its exit from the European Union, leaders have failed to narrow differences on a post-Brexit trade deal.
The pound though trimmed earlier losses and briefly popped into positive territory after Britain said it had clinched a deal with the European Union over how to manage the Ireland-Northern Ireland border.
Against the dollar, the pound was last down 0.2% at $1.3354. It was also 0.1% lower against the euro, which rose to 90.63 pence.
Implied volatility on the pound – a measure of expected future swings in the currency – hit eight-month highs, a sign that traders were preparing for gyrations.
The dollar was up 0.1% against the yen at 104.16 yen, but fell 0.2% versus the Swiss franc to 0.8893 franc.