US dollar drops; Euro gains 0.5% to US$1.21

London

THE US dollar dropped on Tuesday as investors prepared for US Treasury Secretary nominee Janet Yellen to talk up the need for major fiscal stimulus and commit to a market-determined exchange rate when she testifies later in the day.

The US dollar's fall came after a 2 per cent rise so far in 2021, a gain which caught off guard many investors who had bet on a further decline following its weakness in 2020.

The US dollar has been helped in January by rising US Treasury yields and some investor caution about the strength of the global economic recovery from the coronavirus pandemic. But most analysts are sticking with their calls for a weaker US dollar from here.

"On fiscal policy, Yellen is to suggest that the US 'act big' and make use of the low borrowing costs. On the (US) dollar, it should be reiterated that the new administration is committed to the market-determined exchange rate. Both are in line with our weak USD outlook," ING analysts wrote.

US President-elect Joe Biden has proposed a US$1.9 trillion fiscal stimulus package.

The Wall Street Journal on Monday reported Dr Yellen, who is appearing before the Senate Finance Committee, will affirm a more conventional commitment to market-set currency rates in her Senate testimony on Tuesday.

The dollar index, which measures the currency against a basket of other currencies, dropped 0.3 per cent to 90.472, but it was still above its more than two-and-a-half-year low of 89.206 touched at the start of this month.

With the US dollar weakening, the euro gained, rising 0.5 per cent to US$1.2132.

More volatile and commodity-linked currencies, such as the Australian dollar, also benefited from the weaker US currency, with the Aussie dollar up 0.3 per cent at US$0.7707.

Rising commodity prices in recent months have boosted currencies of countries with large commodity exports, such as Australia and Canada.

"We continue to see scope for further gains in commodity-related currencies in the year ahead, which should benefit as well from the strengthening global recovery once vaccines are rolled out more widely," said Lee Hardman, an analyst at MUFG.

Sterling rose 0.2 per cent to US$1.3620. The US dollar rose against the yen and was last up 0.3 per cent to 104.02 yen, although still consolidating in a narrow range after reaching a one-month high of 104.40 last week. REUTERS