Dollar Gains on Virus Worries; Sterling Shows Strength

By Peter Nurse

Investing.com - The return of risk aversion to the financial markets Tuesday has prompted more gains for the U.S. dollar, amid concerns about the extent of the damage caused by the coronavirus in China, but sterling is also showing signs of strength.

At 03:00 ET (0800 GMT), EUR/USD traded at 1.0836, just off the low of 1.0823, the lowest level since April 2017. The U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 99.073, having earlier climbed as high as 99.132, again at heights not seen for over two years. GBP/USD traded at 1.30, down just 0.1%. Additionally, the USD/CNY pair gained 0.3%, climbing to 7.0022, and back above the physiologically important 7 level.

The Australian dollar also traded lower after the Reserve Bank of Australia reiterated that low interest rates will probably be required for an extended period, flagging concerns about the coronavirus.

At 03:00 ET (0800 GMT), the AUD/USD pair fell 0.4% to 0.6683.

The number of new Covid-19 cases fell to 1,886 on Monday from 2,048 the day before. However, the World Health Organization cautioned Tuesday that "every scenario is still on the table" in terms of the epidemic's evolution.

Throw in tech giant Apple’s warning that it doesn’t expect to meet its revenue guidance for the March quarter; a senior Chinese official saying that the Covid-19 virus would have a “major” impact on February’s production and supply chains; and the likes of Capital Economics stating in a report that it is now all but certain that China's economy will contract in quarter-on-quarter terms in the first quarter, and it’s no surprise the dollar, which is often seen as a safe haven, is in demand.

The U.K. pound is a less likely buying candidate, but it has moved sharply higher against the beleaguered euro.

Sterling closed last week on a high note after the resignation of Chancellor Sajid Javid, “many have taken as an indication that Boris Johnson’s team is gearing up for a more significant fiscal stimulus package set to be announced in March,” said John Hardy, Head of FX Strategy at Saxo Bank. “The prospects for an economic rebound on fiscal policy doing the heavy lifting would allow the Bank of England to maintain the policy rate unchanged for now.”

This has resulted in the euro falling back its lowest level versus the pound since the December election and since just after the Brexit vote back in 2016.

At 03:00 AM ET (0800 GMT), EUR/GBP traded at 0.8336, just off the 0.8327 low seen earlier Tuesday.

More losses are possible, with the German ZEW, at 05:00 AM ET (1000 GMT), likely to show a sharp drop in confidence in the eurozone’s largest economy with this being the first post-coronavirus sentiment indicator. Additionally, employment data in the U.K., half an hour earlier, is likely to show the jobs market remains healthy.

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