Dollar drops as less stimulus dents expectations of higher bond yields

NEW YORK (Reuters) – The U.S. dollar fell to two-week low against a basket of currencies and a seven-month low against the Japanese yen, as investors adjusted for the prospect that Republicans will maintain control of the U.S. senate, and stifle any plans for a large new stimulus package.

FILE PHOTO: U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking

Democrat Joe Biden edged closer to victory in the U.S. presidential race as election officials tallied votes in the handful of states that will determine the outcome and protesters took to the streets.

But the so called ‘blue wave’ where Democrats would also take control of the Senate in Congressional elections looked unlikely.

“I think the market’s assuming that Biden wins the White House but that the Senate is not going to be in the Democrats’ hands, so you don’t have as big of a stimulus,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

U.S. Treasury yields dropped from four-month highs as a large jump in near-term supply to fund stimulus became less likely, reducing the appeal of the debt and weighing on the dollar.

“Typically a country with a large budget deficit, a large current account deficit, has to offer a large interest rate premium to suck in world savings, and because we can’t, because of the weak economy, the low inflation, I think that we can’t offer a sufficiently high interest rate premium,” said Chandler. “This is a broad dollar move.”

Stronger risk appetite as stock investors bet that Republicans would stifle any Democrat plans to raise taxes or tighten corporate regulations also helped to reduce demand for the greenback.

The dollar index fell 0.81% against a basket of currencies to 92.66.

The euro jumped 0.90% to $1.1828. The dollar dropped 0.68% against the Japanese yen to 103.77 yen, the lowest since March 12, and breached technical support at 104 yen that will now likely form resistance.

The yuan gained to a more than two-year high of 6.5994. The Chinese currency has been heavily affected by Sino-U.S. disputes since the outbreak of the bilateral trade war in 2018.

The Federal Reserve will complete its two-day meeting on Thursday, but is not expected to announce any major changes in monetary policy.

“The Fed today is a bit of a sideshow but there is a chance it may strengthen forward guidance around potential quantitative easing and that would be dollar negative as you may also have less stimulus,” said Justin Onuekwusi, portfolio manager at LGIM.

The dollar was also weak against the British pound and Norwegian crown even after the Bank of England ramped up its bond purchase plan and Norway’s central bank said it would maintain its accommodating policy.

U.S. jobs data for October released on Friday is the next major economic focus.

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