Spread of virus mutation keeps euro and pound under pressure

[December 22, 2020]  By Julien Ponthus

LONDON (Reuters) -The euro and the pound were on the defensive against the dollar on Tuesday as a new coronavirus strain spread across Britain, closing key trade routes and creating a supply-chain nightmare while time was running out to strike a post-Brexit trade deal.

The pressure on European assets, however, eased after a sell-off on Monday caused by shut-down of the border with France and angst over Brexit trade talks.

With European stock markets back in positive territory, sentiment improved on foreign exchange markets for Europe's top currencies.

At 1148 GMT, the euro was down 0.11% at $1.2235 and the pound was losing 0.44% at $1.3412, after falling as much as 2.5% the day before. Sterling was also down 0.30% at 91.20 pence against the euro after heavy losses on Monday.

However, data showed Britain's economy recovered quicker than expected in the third quarter from its coronavirus crash.

Talks between the French and British governments to reopen their border continued, but trade talks between the European Union and the UK remained stalled, with disagreements over fishing rights the main obstacle.

The dollar index, which measures it against a basket of currencies, rose just 0.05% at 90.167 after the U.S. Congress agreed the new stimulus package.

The dollar's timid gains come in a market that is positioned for a weaker dollar. It's pricing in a pandemic recovery that lifts commodity prices and benefits exporters and their currencies at the expense of the dollar.

The value of overall bets against the dollar eased last week, positioning data showed, but remains near nine-year highs struck in September.

But Britain crashing out of the EU without a trade deal and expectations that the new coronavirus could worsen the economic outlook of Europe might dent the consensus, said Marios Hadjikyriacos, an analyst at XM.

"If the Eurozone and Britain are forced to play the rolling shutdown game until the vaccines are fully deployed, then the popular narrative for a weaker dollar into 2021 may come under heavy fire as America heals its economic wounds faster", he told his clients in a note.

The Australian dollar fell 0.5% to $0.7547. The New Zealand dollar lost 0.58% to 0.7063.

The yuan, which has gained nearly 10% on the dollar since a March low, has been steady for about a week and was down just 0.09% at 6.5419 per dollar.

(Reporting by Julien Ponthus; editing by Larry King)

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