NEW YORK (Reuters) – The dollar dipped on Tuesday, but moves were muted as investors awaited the outcome of fiscal stimulus talks ahead of the upcoming U.S. presidential election and as coronavirus cases spiked in Europe.
The dollar index declined 0.31% and was on track for its second day of declines as House Speaker Nancy Pelosi set the end of the day as a deadline for negotiations over a coronavirus aid package.
“As important as the fiscal talks are to broader market sentiment, I think FX has really been looking forward to the U.S. election,” said Mazen Issa, senior FX strategist at TD Securities.
“I don’t think at this point right now the market really expects it to happen before the election, so it looks much more like political theater than anything else,” he said of the stimulus talks.
As polls have widened in favor of Democratic presidential candidate Joe Biden, foreign exchange volumes have been dropping, he added.
While markets are confident a win by Biden would lead to more fiscal stimulus, potentially weakening the dollar, investors are also wary of a potentially contested election result that might boost the safe-haven appeal of the greenback.
“As we approach U.S. elections and with COVID infections around the globe rising at a fast pace, investors may refrain from engaging into large trading positions,” said Charalambos Pissouros, a senior market analyst at JFD Group.
France reported a massive jump in people hospitalized and Ireland announced some of Europe’s toughest restrictions.
The euro rebounded to a one-week high on Tuesday as global stocks recovered from early losses with investors broadly in consolidation mode before the Nov. 3. presidential vote.
Markets stayed within well-worn recent ranges.
“Currency markets are in wait-and-watch mode with traders unwilling to take big bets before such a major event risk,” said Lee Hardman, currency strategist at MUFG in London.
The euro rebounded 0.38% to a one-week high at $1.1815 after weakening 0.1% to $1.17600 in early London trading.
That reflected a broader recovery in European stock markets which popped into positive territory after registering some early losses. U.S. stock opened higher.
Elsewhere, the Australian dollar dropped 0.53%, hitting a three-week low at 0.7030 on increasing expectations of monetary easing next month by the central bank.
Minutes of the Reserve Bank of Australia’s (RBA) last policy meeting confirmed the board had discussed cutting rates and buying longer-dated debt as a means to support the economy and restrain the currency.
Sterling edged up slightly, adding to small gains made the previous day; it rose 0.16% to 1.2971.
Britain’s chief Brexit negotiator David Frost said there was no basis to resume trade talks with the European Union unless there was a fundamental change in Brussels’ approach.
The pound’s resilience to negative news flows pointed to optimism that a deal will eventually go through, said Stephen Innes, chief global market strategist at Axi.
“Let’s hope constructive progress endures. It feels like we are playing a pinball machine, getting bounced around but not going anywhere these days,” he said.
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