Dollar edges higher; sterling under brexit pressure

NEW YORK: The dollar edged higher from weak levels in early European trade Tuesday, with traders balancing rising Covid-19 cases and expanding lockdowns with likely fiscal stimulus and a vaccine rollout.
At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 90.907, only slightly above the 2 1/2-year low of 90.471 on Friday.
EUR/USD edged 0.1% higher to 1.2112, but off Friday’s high of 1.2177, a level last seen in April 2018, while the risk-sensitive AUD/USD was down 0.2% at 0.7409.
The U.S. Congress is poised to vote this week on a stopgap funding measure. This is likely to pass, allowing the lawmakers more time to negotiate an emergency coronavirus stimulus plan, with a deal of around $908 billion already on the table.
The need for such a package is beyond dispute, with many states posting new records for deaths and hospitalizations following the Thanksgiving holiday. This has prompted new restrictions, with California shutting all but critical infrastructure and retail operations in its worst-hit areas, while a ban on indoor restaurant dining is also looming in New York City.
That said, ING kept its bearish dollar call, expecting the greenback to fall a further 5%-10% against most currencies in 2021.
“Central to this bearish dollar call is: (i) continued good news on vaccine approvals and roll outs such that economic growth can accelerate (probably from 2Q onwards) and (ii) the Fed keeping the punchbowl of cheap liquidity in place and not blinking when inflation starts to rise,” ING analysts wrote in a research note.
The U.K. starts to vaccinate its public Tuesday with the Pfizer/BioNTech injection, while the U.S. Food and Drug Administration meets to potentially authorize the use of this vaccine on Thursday.
Elsewhere, GBP/USD dropped 0.3% to 1.3336, continuing to retreat from the two-and-a-half year high of $1.3540 seen on Friday, amid uncertainty over the outcome of a post-Brexit trade deal.
UK Prime Minister Boris Johnson is set to travel to Brussels later Tuesday in a last-ditch effort to broker a deal with European Commission President Ursula von der Leyen, as difficulties remain over issues such as fishing rights waters around the UK, fair competition and ways to solve future disputes.
The relatively small losses in sterling suggest that most traders still expect a deal to be agreed at the last minute, but time is running short.
“A deal would unlock some modest upside for sterling, but a lack of risk premium means there is potential for plenty more downside should talks end without an agreement,” ING analysts said.