Dollar holds gains as fear of renewed pandemic gathers pace

By Tom Westbrook

SINGAPORE (Reuters) – The U.S. dollar touched a three-week high and commodity currencies were stalled on Monday, as renewed worries about a second wave of coronavirus infections sent investors into safer assets.

Moves were modest, as few expect spiking case numbers to prompt fresh lockdowns at this point.

But with the World Health Organization reporting a record increase in global cases on Sunday, especially in the Americas, and Apple Inc (O:AAPL) protectively closing 11 U.S. stores last week, there was no immediate cause for optimism either.

Against a basket of currencies (=USD), the dollar held on to small gains won last week and moved a whisker higher to 97.744, before edging back to flat.

The greenback was marginally lower against the Australian and New Zealand dollars, and steady on the yuan, euro and British pound.

The yen was firm at 106.92 per U.S. dollar, not far from a one-month high of 106.58 hit earlier this month.

“We expect the FX markets to remain caught between recovering economic indicators and concerns about a second-wave of COVID-19 infections in the week ahead,” analysts at Barclays (LON:BARC) said in a note.

Barclays expects continued pressure on the kiwi, but said gains in the euro are possible if Purchasing Managers Index (PMI) data due on Tuesday beats expectations and recommended going long on euro/dollar, with a $1.14 target.

The single currency (EUR=) last traded flat at $1.1176 after dipping to a three-week low of $1.1168 in early trade – squeezed as European Union leaders remain divided on how to structure a planned COVID-19 recovery fund.

The pound , weighted as well by Brexit worries since there has been little progress in trade discussions with Europe, held just above a three-week low at $1.2363.

LOCKDOWNS LINGER

Total global coronavirus cases are now over 8.7 million and focus has been on whether this may drive fresh lockdowns.

While that is seen as unlikely, localised restrictions have been re-imposed in Beijing to contain an outbreak there and Australia’s Victoria state has also re-imposed limits on gatherings to contain a spike in cases.

The risk-sensitive Australian dollar slipped against the U.S. dollar and yen in morning trade, before paring losses to inch about 0.2% higher against both. It last bought $0.6844 and 73.18 yen.

The New Zealand dollar was also a fraction stronger at US$0.6418, though both currencies have lost the momentum they had in early June.

The Reserve Bank of New Zealand announces its latest benchmark interest rate settings on Wednesday. It is all but certain to keep rates on hold at 0.25%, leaving markets to focus on its tone and on talk of negative rates in the future.

Besides Tuesday’s PMI data and German sentiment surveys, also due on Tuesday, investors will also be looking to U.S. consumer sentiment figures to gauge whether encouraging signs of recovery from May can be sustained.

A jump in net short bets on the U.S. dollar last week to their highest since 2018 suggests investors are positioned for the world’s rapid economic recovery to continue apace – leaving plenty of room for surprises on the downside.

At the same time, a slowdown in global central banks drawing on the U.S. Federal Reserve’s emergency dollar funding lines could also provide dollar support.

While the reduction in central bank currency swaps, on one hand, suggests a return to normality, it also marks a pullback in one aspect of the Fed’s enormous support for global markets.

“It won’t take much for the market to see this as a liquidity headwind,” said Chris Weston, head of research at Melbourne brokerage Pepperstone.

“And when we mix in rising concerns around a renewed COVID crisis then it may keep risk on the back foot this week.”