Dollar Rises on Risk Aversion, Fed Cautious on Economic Recovery

By Saqib Iqbal Ahmed and Karen Brettell

NEW YORK (Reuters) – The dollar was boosted by safety buying on Wednesday as investors turned more cautious on worries about the economic impact of the COVID-19, and after the U.S. Federal Reserve expressed concerns about the pace of the economic recovery.

Stocks and Treasury yields slipped while the safe-haven U.S. dollar drew buyers. [.N]

“There are a lot of concerns about the effectiveness of the vaccine roll out in the United States,” said Minh Trang, senior FX trader at Silicon Valley Bank. “Today is a solid risk-off day for sure.”

The Federal Reserve left its key overnight interest rate near zero and made no change to its monthly bond purchases, pledging again to keep those economic pillars in place until there is a full rebound from the pandemic-triggered recession.

That has not happened, and the Fed in a policy statement flagged a potential slowing in the pace of the recovery.

“If anything the dollar is finding support from the Fed’s more cautious message. I would say that the Fed having noted the recent moderation in the pace of the recovery is adding to concerns about the near-term outlook,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Global coronavirus cases surpassed 100 million on Wednesday, according to a Reuters tally, as countries around the world struggle with new virus variants and vaccine shortfalls.

The U.S. Dollar Currency Index gained 0.53% to 90.636, after earlier reaching 90.896, its highest level since Jan. 18.

The euro was 0.48% lower on the day at $1.2101.

The single currency was further pressured after the German government on Wednesday slashed its growth forecast for Europe’s largest economy to 3% this year, a sharp revision from last autumn’s estimate of 4.4%, caused by a second coronavirus lockdown.

The risk-sensitive Australian dollar sank 1.08% to $0.7664 after earlier falling to $0.7642, the lowest level since Jan. 4.

Silicon Valley Bank’s Trang cited the historically elevated level of bearish bets against the greenback as part of the reason for the U.S. currency’s strength as investors rush to trim those wagers.

Despite the dollar’s recent rebound from multi-year lows, bearish bets on the U.S. currency are at a decade-high.

“Anytime you see that kind of buildup and you see a certain reversal, you will see a substantial move,” Trang said.

Sterling rose to a fresh eight-month high against the euro on Wednesday as Britain’s faster COVID-19 vaccine rollout than the European Union’s offered support to the pound.

Meanwhile bitcoin fell in a volatile session and slipped below $30,000 for the first time since Jan. 22. It later recovered to $30,686, down 5.59% on the day. It is down 27% from a record $42,000 reached on Jan. 8, but up around 174% since its recent run up began in mid-October.

(Reporting by Saqib Iqbal Ahmed and Karen Brettell in New York; Editing by Matthew Lewis)