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Dollar erases gains as sentiment steadies

Dollar erases gains as sentiment steadies
July 20, 2021

LONDON (Reuters) – The US dollar erased earlier gains on Tuesday as global markets steadied after an overnight selloff, though popular reflation trades in the $6.6 trillion a day currency markets were under pressure amid fears of a stalled global recovery.

Investors are keeping an anxious eye on the fast-spreading Delta variant of coronavirus, now the dominant strain worldwide, fearing it could stymie the global economic recovery. The United States has seen a surge in infections, especially in areas where vaccinations have lagged.

Against a basket of its rivals, the greenback dipped into negative territory after touching an early-April high of 93.041 hit in the previous session.

"After such an aggressive move yesterday, most likely currencies will follow equities today, so if we get a bounce then we should also see risk currencies hold. But if equities sell off again later, then the Aussie, Kiwi and the Canadian dollar will come under pressure," said John Marley, CEO of forexxtra, a London-based FX consultancy.

The Aussie dollar/Swiss franc cross, a favourite proxy in currency markets for economic recovery bets, fell to its lowest level since December 2020 at 0.6714 francs , extending its losses to 4% in the last 10 trading sessions, according to Refinitiv data.

The Aussie's losses were broad-based as minutes of the Reserve Bank of Australia's policy meeting this month were seen by some economists as a sign that the central bank may reverse a decision to taper stimulus.

The risk-off sentiment remained the dominant driver in global currency markets, with the dollar, the yen and the Swiss franc benefiting against rivals.

The gains in the dollar and other perceived safe-haven currencies comes at a time when yield differentials have moved against them. Benchmark ten-year US Treasury yields dipped to a five-month low below 1.20% on Monday.

"The price action continues to send an ominous warning signal over the global growth outlook and indicates that market participants are becoming fearful over a more notable slowdown ahead," MUFG strategists said in a daily note.

The euro weakened 0.1% to $1.17845, after dipping overnight to the lowest since early April at $1.1764 before a European Central Bank policy decision on Thursday.

The British pound was also among the top losers in early London trading, with the currency declining 0.2% at $1.36470 as Boris Johnson's "freedom day" - ending over a year of COVID-19 lockdown restrictions in England - was marred by surging infections.

In cryptocurrencies, bitcoin sank as low as $29,500, a level not seen since June 22, before trading 3.4% lower at $29,748.30. Rival ether dropped nearly 5% to $1,730.33 before trimming some losses.