Dollar hits lowest since March 2018 on Democrat gains in U.S. senate
election
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[January 06, 2021] By
Elizabeth Howcroft
LONDON (Reuters) - The dollar hit its
lowest level in nearly three years on Wednesday, with markets pricing in
a Democrat win in the U.S. Senate election in Georgia that would pave
the way for a larger fiscal stimulus package and fuel currency market
risk appetite.
Democrats won one hotly contested U.S. Senate race in Georgia and pulled
ahead in the second by 1200 GMT, edging closer to control of the
chamber.
Analysts generally assume a Democrat-controlled Senate would be positive
for economic growth globally and thus for most riskier assets, but
negative for bonds and the dollar as the U.S. budget and trade deficits
swell even further.
As markets priced in the Democrats winning both seats, the dollar index
hit its lowest since March 2018, extending its overnight losses during
the European session. At 1153 GMT, it was at 89.292, down 0.2% on the
day.
The dollar also fell to its lowest in six years versus the Swiss franc
at 0.87585 .
"The reaction pattern is along the lines of what we were originally
expecting if we had seen a Blue wave scenario in the original November
(U.S. presidential) election," said Saxo Bank's head of FX strategy,
John Hardy.
"It’s still a pretty tough environment to do stimulus and to do
legislation but it’s much more possible than if there was no majority
there for the Democrats," he said.
Hardy said that although the increased likelihood of U.S. fiscal
stimulus is in line with expectations for dollar weakness, if the recent
rise in U.S. Treasury yields continues, then that could curtail the
dollar's ability to fall in the longer term.
The euro was up 0.3% at $1.2335, having risen past major resistance to
hit as high as $1.2346 in early European trading.
"We had not assumed Democrat victories in these elections and hence some
revisions weaker to the extent of USD weakness we expect this year may
be warranted," Derek Halpenny, head of research at MUFG, wrote in a note
to clients.
"We currently tentatively are targeting 1.2800 for EUR/USD by year-end,"
he added.
But Elsa Lignos, global head of FX strategy at RBC Capital Markets said
that she disagreed with the market consensus that U.S. fiscal stimulus
is "risk-on" and therefore dollar-negative.
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A U.S. five dollar note is seen in this illustration photo June 1,
2017. REUTERS/Thomas White/Illustration
Instead, she said, big infrastructure spending in the U.S. would strengthen the
dollar, particular against non-commodity producing developed market currencies.
Riskier currencies also surged, with the New Zealand dollar and Australian
dollar hitting their highest since 2018 and holding onto these gains in the
European session.
The move was helped by a range of surveys overnight showing that manufacturing
globally had proved resilient in December, despite escalating virus cases.
A decisive outcome in Georgia could arrive as soon as Wednesday morning in the
United States, although the tightness of the count suggests an official result
may take longer.
For a graphic on Dollar index:
https://fingfx.thomsonreuters.com/
gfx/mkt/yzdpxjbjjpx/dollar%20index.png
Elsewhere, U.S. President Donald Trump escalated tensions with Beijing by
signing an executive order banning U.S. transactions with eight Chinese software
applications.
After surging on Monday and Tuesday, the yuan softened, after China's central
bank appeared to signal a preference for a more moderate pace of intervention.
The yuan has gained around 10% on the dollar since last May as China's economic
rebound has led the world's pandemic recovery.
Bitcoin traded above $35,000 for the first time, rising to $35,879 in the Asian
session and extending a rally that has seen it rise more the 800% since
mid-March.
These gains waned as European markets opened, with bitcoin at $35,050.00 at 1200
GMT.
(Reporting by Elizabeth Howcroft; Editing by Alexander Smith and Bernadette
Baum)
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