Dollar advances as investors shy away from risk

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The dollar edged higher against a basket of currencies on Monday, as a burst of volatility in stock markets around the globe sapped investors’ appetite for riskier currencies.

Concerns over the timing and size of additional U.S. fiscal stimulus sent major U.S. stock indexes briefly more than 1% lower before they recovered to trade little changed on the day.

The sharp move in stock markets soured FX traders’ appetite for risk, Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, said.

“Your high beta currencies – currencies that are highly correlated with equity markets and global risk appetites – are tumbling in synchrony with equity indexes,” Schamotta said.

Market sentiment turned more cautious at the end of last week as European economic data showed that lockdown restrictions to limit the spread of the coronavirus hurt business activity.

The U.S. Dollar Currency Index was 0.19% higher at 90.396, after rising as high as 90.523, its strongest since Jan. 20.

The euro was down around 0.28% against the dollar. German business morale slumped to a six-month low in January as a second wave of COVID-19 halted a recovery in Europe’s largest economy, which will stagnate in the first quarter, the Ifo economic institute said on Monday.

The Australian dollar – seen as a liquid proxy for risk – was 0.16% lower against the dollar.

U.S. stocks have scaled new highs in recent sessions even as concerns about the pandemic-hit economy remain. Investors are trying to gauge whether officials in U.S. President Joe Biden’s administration could head off Republican concerns that his $1.9 trillion pandemic relief proposal was too expensive.

Despite the dollar’s recent rebound – the dollar index is up about 1.3% since early January – analysts expect a broad dollar decline during 2021. The net speculative short position on the dollar grew to its largest in 10 years in the week to Jan. 19, according to weekly futures data from CFTC released on Friday.

The U.S. Federal Reserve meets on Wednesday and Chair Jerome Powell is expected to signal that he has no plans to wind back the Fed’s massive stimulus any time soon – news which could push the dollar down further.

Sterling strengthened on Monday against the weaker euro as Britain’s COVID-19 vaccine rollout over the weekend offered support to the British currency.

(Reporting by Saqib Iqbal Ahmed; Editing by Andrea Ricci and Sonya Hepinstall)