Dollar clings on to gains on fears of new COVID-19 cases, U.S.-Sino tensions

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Dollar clings on to gains on fears of new COVID-19 cases

The U.S. dollar clung on to gains on Tuesday on growing fears about a second wave of coronavirus infections and after the Federal Reserve played down the likelihood of negative U.S. interest rates, boosting the currency’s yield attraction.

Fed policymakers say they will do what it takes to cushion an economy crushed by widespread lockdowns aimed at slowing the spread of the coronavirus, but will likely stop short of cutting interest rates to below zero.

New coronavirus infections have been found in China, South Korea and Germany, where respective governments have eased lockdown restrictions.

A re-emergence of novel coronavirus cases could dent a global economic recovery which was supposed to be propelled by an injection of monetary and fiscal stimulus.

“While the numbers of cases was relatively small, they do play into market fears over the threat posed by a second wave of COVID-19 infections and highlight the challenging path ahead for the global economy,” said Lee Hardman, currency analyst at MUFG.

The euro was last up slightly against the U.S. currency at $1.0818, though still not too far from the $1.0636 low touched at the end of March when the pandemic sent markets into turmoil.

Other majors nursed losses, except the yen which increased by 0.1% to 107.55 versus the dollar. The Australian dollar was the biggest mover in Asian trading, dipping to a five-day low of 0.6432 after China banned some Australian meat imports. It later pared losses as Australia’s trade minister played down the issue as a technicality.

The Nordic currencies rose, however, with the Norwegian crown last up 0.5% at 10.2440.

Richard Falkenhäll, senior FX strategist at SEB, said investors were anticipating Norges Bank buying more crowns going forward as the country looks to widen its fiscal deficit, supporting it with capital from the government’s oil fund.

Norway will sharply raise spending this year from its trillion-dollar sovereign wealth fund, the government said on Tuesday, exceeding a self-imposed cap for the first time in over a decade to aid an economy reeling from the coronavirus crisis.

As the fund is denominated in foreign currency, this would lead to more crown buying, Falkenhäll said, adding SEB expects the central bank to increase purchases to 2.2 billion crowns a day from the current 2.1 billion.

The Swedish crown followed suit, rising 0.4% to 9.8205.

The greenback overall was supported by the possibility of U.S. President Donald Trump instructing a federal pension fund not to buy Chinese equities, making investors cautious on U.S.-Sino relations.

The White House on Monday named three nominees to sit on a board that oversees federal employee pension funds, a move that could see the reversal of a decision to allow one of the funds to invest in Chinese companies under scrutiny from Washington.

Trump also said he opposed re-opening “Phase 1” trade negotiations after China’s state-run Global Times floated the idea on Monday.

Traders will be looking for Fed Chairman Jerome Powell’s speech on current economic issues on Wednesday, during which he will be scrutinised on his views about the future of the monetary policy.

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