LDN - Business

Dollar rises as risk appetite tempered by rising COVID-19 cases in U.S.

[July 03, 2020] By Elizabeth Howcroft

LONDON (Reuters) - The dollar edged up on Friday and currency traders' risk appetite was boosted only slightly by better-than-expected jobs data in the United States, as surging coronavirus cases continued to taper market optimism.

U.S. payrolls surged on Thursday but the reaction in currencies was limited. Even after two months of job recovery from May, the U.S. economy has regained just over a third of an historic plunge of 20.787 million jobs lost in April.

Broader market sentiment improved as Asian shares rallied to a four-month high overnight following a brisk pickup in Chinese service sector activity.

Against a basket of currencies, the dollar rose less than 0.1%, to 97.289 at 0948 GMT <=USD>. It is still on track for its biggest weekly fall since the first week of June.

Graphic: Dollar index on track for biggest weekly fall - https://fingfx.thomsonreuters.com/
gfx/mkt/xklpyzbdlvg/dollar%20change.png

"In a week characterized by dropping FX volatility, the dollar looks to be re-establishing a gentle bear-trend as equities keep showing complacency to grim contagion news," FX strategists at ING wrote in a note to clients.

"Such complacency still indicates the short-term outlook for risk assets is not lacking hurdles, but there is still a material chance we have seen the peak in the dollar," they added.

Riskier currencies edged up, with the New Zealand dollar up 0.1% at 0.6519 versus the U.S. dollar <NZD=D3> and the Australian dollar up 0.1% at 0.6932 <AUD=D3>.

The Norwegian crown rose around 0.2% versus the dollar, at 9.552, on track for its best week since the first week of June <NOK=D3>.

The euro was down slightly against the dollar, at 1.12295 <EUR=EBS>. It gained against the safe-haven Swiss franc <EURCHF=EBS> and fell versus the commodity-driven Norwegian crown <EURNOK=D3>.

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A U.S. Dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration

Traders have been balancing hopes for an economic recovery with surging coronavirus infections, particularly in the United States, where infections are rising in the majority of states.

"We are surprised about an emerging consensus that a much-faster-than-expected recovery justifies support for risk assets. What we see in the latest data is just base effects, as economies exit the lockdown," Bank of America FX strategists Michalis Rousakis and Rohit Garg said in note.

"We would expect global output to stabilize soon to well below pre-crisis levels. This is not a V," they added.

U.S. states have delayed and in some cases reversed plans to let stores reopen and activities resume.

"The chances have risen that risk aversion will rise again over the coming days due to the negative news flow, allowing the dollar to appreciate, rather than optimism making further ground," wrote Antje Praefcke, FX analyst at Commerzbank.

"The downside in EUR-USD still seems to be the weaker side currently," she added.

Relations between the United States and China are also in focus over China's strategy in Hong Kong.

The U.S. Senate unanimously approved legislation on Thursday to penalise banks doing business with Chinese officials who help implement Beijing's new national security law for Hong Kong.

With U.S. markets closed for a public holiday on Friday, and no significant data releases, analysts expect a quiet day.

(Reporting by Elizabeth Howcroft; Editing by Elaine Hardcastle and Emelia Sithole-Matarise)

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