Risk FX retreat catapults dollar to 3-month top as reflation doubts
reemerge
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[July 19, 2021] By
Ritvik Carvalho
LONDON (Reuters) - Currencies such as the
Australian dollar, the Canadian dollar, Norway's crown and Britain's
pound took a beating on Monday, catapulting the U.S. dollar to its
highest in 3 months as a worldwide surge in coronavirus cases hit
sentiment in global markets.
The only major currency which did not cede ground to the dollar was the
safe haven Japanese yen, which gained 0.3% on the day to 109.74 yen to
the dollar.
With England lifting all COVID-19 social restrictions on what some local
media has dubbed "Freedom Day", the continued spread of the highly
contagious Delta variant of the coronavirus drew further doubt from
investors about whether a total economic recovery to pre-pandemic levels
is possible.
Earlier this week, British health minister Sajid Javid announced he had
tested positive for COVID-19 and was in self-isolation, also forcing
Prime Minister Boris Johnson and finance minister Rishi Sunak into
quarantine. Sterling hit a 3-month low against the dollar of $1.3703. [GBP/]
The dollar benefited from the risk aversion in global markets, with the
index that measures its strength against peer currencies hitting its
highest since April 5. The greenback also benefited from the divergence
in trans-Atlantic real yields.
Germany's 10-year inflation-linked bond yield fell to its lowest in
nearly two years on Monday on concerns that the resurgent Delta COVID-19
variant would undermine economic recovery and weigh further on euro zone
inflation.
"We're starting to see the FX markets catch-up to bond markets, and more
recently equity markets, in terms of fading reflation bets," said Viraj
Patel, FX and global macro strategist at Vanda Research.
"We think it's wise to start taking chips off the table as risks of a
policy mistake on both sides of the Atlantic are increasing (Fed
tightening amid a growth moderation or Europe reopening amid Delta)."
Graphic: Dollar resilient:
https://fingfx.thomsonreuters.com/
gfx/mkt/oakveddjnpr/Pasted%20image%201626688349489.png
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Four thousand U.S. dollars are counted out by a banker counting
currency at a bank in Westminster, Colorado November 3, 2009.
REUTERS/Rick Wilking
The Aussie dollar, which hit its lowest since December 2020 during Asian hours,
extended those losses during morning trade in London to hit a low of $0.7363. It
was down 0.6% on the day.
The Canadian dollar, which dropped through its 200-day moving average in Asian
trade, fell past C$1.27 against its U.S. counterpart to C$1.2780, its lowest
since Feb. 8. It was down 1.2% on the day.
"Despite rising vaccination rates, a return to pre-corona normality seems
questionable," said Ulrich Leuchtmann, head of FX and commodity research at
Commerzbank in a morning research note.
If consumption and production were not to return to 2019 levels Leuchtmann said,
a significant chunk of productive capacities worldwide would "not just lie idle
temporarily but would become devalued on a permanent basis."
"If we are no longer simply dealing with who will survive the corona period but
about whose goods and services will remain in demand long term at all the risk
perception of the markets will rise. It is hardly surprising that the FX market
cannot decouple from that."
The euro dipped 0.3% to $1.1777. Investors will look to this week's European
Central Bank meeting.
Also taking a beating among European currencies was the Norwegian crown, which
fell 1% to its lowest since November 2020 at 8.9320 crowns per dollar.
(Reporting by Ritvik Carvalho; additional reporting by Tom Westbrook in
Singapore and Saikat Chatterjee in London, Editing by William Maclean)
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