Dollar firms on rising novel coronavirus crisis worries

London

THE dollar firmed on Wednesday as optimism that the novel coronavirus crisis was slowing waned, increasing investor concerns over the economic impact of the pandemic. The euro was the main loser at the greenback's expense, a day after the dollar suffered its worst drop against a basket of currencies in nearly two weeks.

The dollar's rise came as global stocks turned negative after two days of gains as deaths from the virus mounted across the globe. European equities fell amid renewed concern about the spread of the virus and the continent's response to it, mirroring Asian markets and a fall on Wall Street late on Tuesday.

The euro fell 0.2 per cent to US$1.0875, hit by the failure of European Union finance ministers to agree on further support for their virus-hit economies. The impasse spooked bond markets and sent shorter-dated Italian yields spiking higher. The talks, to agree to a package of measures for governments, companies and individuals, were suspended until Thursday.

A feud between Italy and the Netherlands over what conditions should be attached to eurozone credit for governments was blocking progress, sources said. "We don't expect much progress to be achieved and a move towards debt mutualisation seems unlikely at this point," ING wrote.

Yet the impasse will likely have a limited impact on the euro against the dollar, the bank said, in part given low market expectations for a so-called "coronabond". The dollar has for a month very closely tracked risk appetite as investors and businesses fearing the worst have rushed to the world's reserve currency. It made gains against the pound, the yen and the Swiss franc, as well as risk-sensitive currencies such as the New Zealand and Australian dollars, before easing slightly.

It last stood flat against the pound at US$1.2345 and the franc at 0.9707, and turned slightly negative against the yen to 108.80. The Aussie, which fell 0.6 per cent in early European trading after ratings agency S&P cut the outlook for its sovereign AAA rating from stable to negative, clawed back losses and turned positive on the day.

Still, some analysts were already starting to look at the potentially negative longer term implications for the dollar of the extraordinary stimulus measures launched by Washington and the US Federal Reserve to lessen the economic damage caused by the pandemic.

"If you assume that Covid-19 is tackled by the end of the year . . . in 2021 we have fiscal deficits, balance sheet expansion, and the supply of dollars through other measures - it's definitely a very strong background for a weaker dollar," said MUFG's Derek Halpenny.

Against a basket of currencies, the dollar edged up 0.1 per cent to 100.050, giving up slightly some of its earlier advance.

The Chinese yuan retreated from a three-week high as the dollar strengthened. REUTERS