January 24, 2022

Dollar clings to 8-week highs on recovery worries amid COVID resurgence

A stack of U.S. $100 bills being counted.

Bay Ismoyo | AFP | Getty Images

The dollar expanded on its eight-week high on Wednesday as U.S. equities fell and investors worried about the pace of the global economic recovery as rising coronavirus infections in Europe brought restrictions and European economic data was weak.

Euro zone business growth ground to a halt in September, raising fears that fresh restrictions to quell a resurgence in coronavirus infections might put the economic recovery into jeopardy.

In Britain, the economy also lost momentum, a business survey showed, as consumer-facing sectors suffered, notably from the end of a government subsidy to support restaurants.

“The market continues to re-evaluate its previously very optimistic stance on the status of global risks out there,” said Ben Randol, senior FX strategist at Bofa Securities in New York. “The newsflow has been negative on the virus and negative on growth. We’ve had some crummy data and also we’ve had the Fed speakers that have been on balance considerably less dovish than the market seemed to expect which puts positions at risk.”

Randol also cited comments from the Federal Reserve that had a less dovish tone than the market had expected. Chicago Federal Reserve President Charles Evans sent investors to the safety of the dollar on Tuesday by floating the idea of rate hikes. Then Fed Vice Chair Richard Clarida said on Wednesday policymakers “are not even going to begin thinking” about raising interest rates until inflation hits 2%.

Randol said Clarida’s comment “suggests that the Fed still reserves the right to pre-emptively lift rates if it thinks that inflation will be a problem.”

The dollar index, which measures the dollar against a basket of six major currencies, was up 0.25% at 94.214 after earlier hitting 94.255, its highest level in two months.

The euro was last down 0.25% at $1.1677 fell to a two-month low of $1.16715 in early morning trading, its lowest since July 27. Traders in the pound and the euro were also worried that Britain and the European Union will fail to agree a free trade deal, which would cause additional economic strain.

While the pound regained some ground as the session wore on to last trade at Tuesday’s closing level of $1.2731, it fell earlier to $1.2676, its lowest since late July.

It came under pressure after British Prime Minister Boris Johnson introduced on Tuesday new restrictions to combat a second wave of the coronavirus.

The Australian dollar was last down 1.13% at US$0.7093, after hitting a seven-week low of $0.70920. The New Zealand dollar dropped 0.95% to $0.6571.

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