Dollar Firm as COVID-19 Resurgence Hits Reflation Trades

Gold gains as softer U.S. dollar, yields lift appeal

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NEWYORK- The U.S. dollar rose on Wednesday from a seven-week low hit overnight, as broad weakness in stock markets triggered by a resurgence of COVID-19 cases in countries from India to Japan fuelled renewed appetite for the safe-haven appeal of the greenback.

The safety bid also supported the Swiss franc and the Japanese yen as the outlook for the global economy soured.

The greenback has weakened more than 2% in April after a strong March rally as investors bet that a global economic recovery premised on a speedy rollout of vaccines would fuel demand for non-dollar currencies like the euro and the Aussie.

The dollar index, which tracks the U.S. currency against six major peers, was up 0.11% at 91.321 in London trading after slumping as low as 90.856 on Tuesday for the first time since March 3.

The greenback’s bounce was also accompanied by softer U.S. Treasury yields as investors weighed the surge in COVID-19 cases against a broad-based selloff in the U.S. dollar in recent weeks despite strong U.S. employment and retail sales data.

Thu Lan Nguyen, a strategist at Commerzbank said more positive U.S. data could easily kick-start another dollar rally, particularly if the uneven pace of vaccinations fuels greater demand for U.S. Treasuries as a hedge against a crisis.

“So for now, U.S. dollar bears should make sure that they don’t get excited too soon,” she said in a note.

The benchmark 10-year Treasury yield was around 1.58%, not far from its lowest since mid-March, as it continued to consolidate following its retreat from the 14-month high at 1.7760% reached at the end of last month.

The biggest casualty of the dollar’s rise in London trading was the euro with the single currency weakening 0.25% at $1.2000, after touching a seven-week high of $1.2079 overnight.

While the euro has benefited from the dollar’s weakness in recent weeks, Georgette Boele, an economist at ABN Amro believes the euro is likely to weaken further in coming days due to U.S. economic outperformance and repricing of ECB rate expectations.

The European Central Bank decides policy on Thursday, with the Federal Reserve following next week.

Declines in U.S. yields and the dollar in April have come as evidence mounted that the Fed would be slower in tightening monetary policy than it had appeared to the market.

Broadly, pandemic developments triggered investor caution.

India reported its highest daily toll of 1,761 deaths from COVID-19, while Canada and the United States extended a land-border closure for non-essential travellers.

The Australian dollar, a barometer for risk appetite, nursed losses at $0.7717 after weakening 0.4% overnight.

In cryptocurrencies, bitcoin traded around $55,000, consolidating following its dip to as low as $51,541.16 on Sunday. It set a record high at $64,895.22 on April 14.

Gold prices rose on Wednesday, hovering near a seven-week high hit earlier this week, as a soggy dollar and a retreat in U.S. Treasury yields lifted demand for the safe-haven metal.

Spot gold was up 0.25% at $1,782 per ounce, after hitting its highest since Feb. 25 at $1,789.77 on Monday.

U.S. gold futures edged 0.1% higher to $1,780 per ounce.

“The U.S. dollar had edged lower this morning, supporting prices, with gold’s upward momentum from overnight continuing in Asia,” OANDA senior market analyst Jeffrey Halley said.

“Providing that U.S. 10-year yields remain softer, gold appears to be gathering strength for a test of the 100-day moving average at $1,802 an ounce in the days ahead.”

The dollar index fell 0.1% against its rivals after touching a near seven-week low, while benchmark 10-year U.S. Treasury yields dropped below 1.6%, reducing the opportunity cost of holding non-yielding bullion.

Market participants now await the European Central Bank meeting on Thursday for further clarity about stimulus plans for the bloc. The U.S. Federal Reserve policy meeting is due next week.

Gold is seen as a hedge against inflation that could follow stimulus measures, but higher Treasury yields have dulled some of the appeal of the non-yielding commodity this year.

“In the big picture, gold prices are moving higher from lows established below $1,700 as the dollar remains weak and U.S. yields declined in the face of a new driver – geopolitics,” Avtar Sandu, senior commodities manager at Phillip Futures, said in a note.

“With a delay due to the accelerating spread of the coronavirus, gold traders would expect the Fed and other central bankers to remain dovish.”

Among other precious metals, silver eased 0.3% to $25.80 per ounce. Palladium rose 0.6% to $2,777.62, while platinum fell 0.4% to $1,182.08.

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