Dollar dips after previous gains amid COVID-19, election uncertainty

The U.S. dollar slipped on Tuesday as investors took some profits after the previous session’s gains that also saw a sell-off in equities, while worries about a second coronavirus wave and uncertainty ahead of the U.S. election persisted.

The greenback fell against the currencies that benefit mostly from higher risk appetite such as the euro, sterling, and commodity-linked currencies rose.

Monday saw the steepest stock market sell-off in a month and a bond rally, but foreign exchange market activity has remained relatively muted, with price moves on Tuesday limited. “The uncertainty in the economic outlook has not changed one bit,” said Edward Moya, senior market analyst, at OANDA in New York, but noted that some positive stories on the U.S. earnings front.

“Markets are becoming more convinced a blue wave is happening,” Moya said, referring to a victory of the Democratic Party in the Senate, House of Representatives, and the White House in next Tuesday’s election.

“The prospects of a Biden administration is probably more positive for the fight against COVID,” he added. Polls give Democrat Joe Biden a solid lead but the contest is much tighter in battleground states that could decide the outcome.

That said, analysts warned investors were clearly cautious after the United States, Russia and France all hit new daily records for COVID-19 infections. They said prices were not moving much because of a reluctance to build positions before the U.S. presidential election on Nov. 3.

After initially falling, the euro was up 0.2% at $1.1826 in late morning trading.

The dollar index, which measures the greenback against a basket of major currencies, weakened 0.2% to 92.92.

The greenback fell 0.3% versus the yen to 104.53 yen, and was little changed against 0.9074.

“Many sources of uncertainty are still preventing clearer trends from emerging,” UniCredit analysts said in a research note. “The impasse on both U.S. budget talks and Brexit negotiations, as well as the implications of rising COVID-19 infections on 4Q20 GDP growth, play in favor of more euro-dollar and sterling-dollar stabilization for now,” they said, pointing to levels of “just above $1.18 and $1.30, respectively.”

The usually risk-sensitive Australian and New Zealand dollars gained.

The yuan weakened after Reuters reported that China’s central bank had neutralised the counter-cyclical factor in its daily yuan midpoint fixing in a move to let the fixing more closely reflect actual market moves.
The move is typically positive for the dollar, said Stephen Innes, chief market strategist, at online brokerage Axi.

“Such a move means dollar/yuan should generally fix higher. The removal of the element would imply greater FX flexibility,” he added. The dollar was last flat 0.1% at 6.7039 yuan.