Dollar pauses its decline on fresh virus worries

By Hideyuki Sano

TOKYO (Reuters) – The U.S. dollar stabilised on Monday after a recent decline as fresh worries about the coronavirus and the global economy prompted investors to hang on to the safe-haven currency.

But analysts said the dollar could resume its fall if the U.S. Federal Reserve reaffirms its commitment to a highly accommodative monetary policy at its rate meeting later this week — as widely expected.

“I don’t think the Fed has any incentives to curtail its stimulus at this point, even though some market players may try to read between the lines for any signs of tapering in stimulus,” said Kazushige Kaida, head of FX sales at State Street Bank’s Tokyo Branch.

“I think the dollar is staying in a downtrend even though it is marking time for now,” he said.

Federal Reserve Chair Jerome Powell is expected to signal he has no plan to wind back the Fed’s massive stimulus any time soon when the central bank concludes its policy review on Wednesday.

The dollar index stood at 90.172, flat on the day. It bounced back on Friday after hitting 90.043 on Thursday, last week’s lowest level.

Economic activity in the euro zone shrank markedly in January as stringent lockdowns to contain the COVID-19 pandemic hit the bloc’s dominant service industry hard while UK data showed British retailers struggled to recover in December.

British Prime Minister Boris Johnson also said on Friday there was evidence a new variant of COVID-19 discovered late last year could be associated with higher mortality, while problems in some vaccine roll-outs also weighed on sentiment.

Downbeat coronavirus news overshadowed some upbeat U.S. data, including a surge in manufacturing and an unexpected jump in existing home sales.

Bets against the dollar have become overcrowded, analysts also said, with U.S. data on Friday showing net dollar short positions swelling to the largest since May 2011.

The euro was little changed at $1.2174 , taking a pause after a 0.8% gain last week.

The common currency is capped in part by signs of political instability in Rome, which has also driven Italian bond yields higher. The yield spread between Italian and German bonds hit its highest since November on Friday.

Italy’s main ruling parties on Friday flagged snap elections as the only way out of its political impasse, if Prime Minister Giuseppe Conte fails to drum up a parliamentary majority after scraping through a confidence vote.

The situation in Italy demonstrates the widespread risks of political instability from popular discontent as communities grow weary of the pandemic, some analysts said.

“The stock markets’ rally during this pandemic is completely dependent on fiscal expansion and debt monetisation by central banks,” said Makoto Noji, chief currency strategist at SMBC Nikko Securities. “Political instability could delay fiscal measures. The year 2021 will not be the same as 2020.”

In Washington, the honeymoon after Joe Biden’s inauguration as President last week means investors are hopeful that at least a part of his $1.9 trillion coronavirus relief plan will come through fairly soon.

The second impeachment trial of former U.S. President Donald Trump expected early next month could complicate his efforts.

Elsewhere, the British pound held firm at $1.3684, not far off a 2-1/2-year high of $1.3745 touched on Thursday thanks in part to Britain’s lead in COVID-19 vaccinations.

Against the yen, the dollar was flat at 103.76 yen.

(Reporting by Hideyuki Sano; Editing by Sam Holmes and Ana Nicolaci da Costa)