New coronavirus strain hits pound as investors flee to dollar

[December 21, 2020]  By Julien Ponthus

LONDON (Reuters) - The British pound and the euro fell on Monday as investors sought refuge in the dollar, after a fast-spreading new coronavirus strain shut down much of the United Kingdom and disrupted international freight.

Sterling fell as much as 2.5% against the dollar in morning trading with the yield on two-year British government bonds falling to a record low as Prime Minister Boris Johnson sought an emergency response to the crisis.

European stock markets fell after most of Europe cut off transport with the UK, sowing chaos for families and companies just days before Britain exits the European Union.

"The British horror stories of a shortage of goods after a hard Brexit are taking on a whole new drive - for a completely different reason," said Commerzbank strategist Ulrich Leuchtmann.

Adding to the pressure were growing fears the UK could crash out of its transition period out of the EU on Jan. 1.

Britain said the EU should shift position to open the way to a post-Brexit trade deal, but there was no sign a breakthrough, notably on fishing rights.

"The EU offer over the weekend was a very generous one, and countries like France, the Netherlands, Denmark, Belgium, and Ireland are very unlikely to make a further offer," Ireland's Foreign Minister Simon Coveney told RTE Radio.

At 1202 GMT, the pound was down 1.91% to $1.3270 and losing ground against the euro, down 1.23% to 91.66 pence. The euro was also falling against the dollar, down 0.65% at $1.2175.

But unlike the pound, which faces structural challenges when it leaves - deal or no deal- the EU, the euro's strength isn't expected to suffer structurally, said Holger Schmieding, chief economist at Berenberg.

Pound and euro banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

"It's a temporary setback in a longer trend", he said, concerning the euro's fall on Monday. He expects the currency to eventually resume its rise towards $1.25.

The pandemic stress in Europe overshadowed a weekend deal among U.S. congressional leaders for a $900 billion coronavirus aid package.

The dollar climbed against major peers on Monday, with investors seeking its relative safety as many countries tightened COVID-19 lockdowns.

The dollar's rebound comes after it sank to two-and-a-half-year lows last week, driven by optimism that vaccines would help revive global growth.

The dollar index gained 0.46% to 90.530, after touching 89.723 on Thursday for the first time since April 2018.

The riskier Antipodean currencies weakened at the start of the holiday-shortened trading week as investors rushed for haven assets.

The Aussie dollar dropped 1.52% to 75.09 U.S. cents.

The U.S. dollar gained 0.37% to 103.68 yen, another safe haven.

(Reporting by Julien Ponthus, editing by Larry King)

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