LDN - Business

Dollar falls; sterling up 1.5% as Brexit deal hopes lift risk appetite

[December 14, 2020] By Elizabeth Howcroft

LONDON (Reuters) - The dollar fell close to two-year lows on Monday as renewed hopes for a Brexit deal and fiscal stimulus in the United States, as well as progress on Covid-19 vaccines, lifted riskier currencies.

The pound gained after the UK and European Union agreed on Sunday to continue Brexit talks and the EU's chief negotiator said a deal was still possible.

At 1220 GMT, the pound was up 1.5% versus the dollar, at $1.3423 - a jump from its low point of $1.3135 on Friday. Versus the euro, it was up around 1.1% at 90.535 pence.

"Despite being a very close call at this stage, we still think a deal is the most likely scenario and therefore expect a GBP rally to materialise in the next two weeks," ING strategists wrote in a note to clients.

"Still, the currency reaction function is asymmetrically skewed to the downside as, despite last week's drop, GBP is still pricing a good probability of a deal," they added.

Wall Street was set to open higher, after the United States began its first shipments of the COVID-19 vaccine to distribution centres on Sunday, raising hopes for a swift recovery from the global coronavirus-induced economic downturn.[nL4N2IU2LD]

The dollar was down around 0.3% against a basket of currencies at 90.534 at 1222 GMT, staying within December's ranges but not far from its lowest since 2018 .

"The expectations of a deal in the UK has actually helped risk sentiment globally," said Neil Jones, head of FX sales for financial institutions at Mizuho.

Jones said that hopes for a fiscal stimulus deal in Washington were also boosting market sentiment.

A $908 billion bipartisan COVID-19 relief plan, which could be introduced in the U.S. Congress as early as Monday, will be split into two packages in a bid to win approval, a person briefed on the matter said.[nL1N2IR2H1]

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Pound and U.S. dollar bills are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

U.S. dollar net short positioning in the latest week climbed to its highest since late September, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

The risky Australian and New Zealand dollars were also up, with the New Zealand dollar reaching its strongest since April 2018, at 0.712.

At 1222 GMT, the Aussie - a liquid proxy for risk - was up 0.4% versus the dollar at 0.75685.

The euro rose around 0.4% versus the dollar, at $1.21545. New coronavirus restrictions on activity in Europe - including a strict lockdown in Germany - had limited market impact.

Elsewhere, China's yuan rose against the dollar as market participants shrugged off an attempt by the Chinese central bank to stem yuan appreciation by reducing capital inflows.

At 1223 GMT, the dollar was down around 0.2% on the day versus the offshore yuan, at 6.5251.

For the week ahead, market participants will focus on a series of central bank meetings, including the U.S. Federal Reserve on Wednesday and the Bank of England on Thursday.

"It’d be interesting to see if we get any commentary from the Bank of England in terms of possible Brexit outcomes and what it would do in the case of a no-deal … that’s probably the one to watch out for this week," said Mizuho's Neil Jones.

(Reporting by Elizabeth Howcroft, editing by Larry King)

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