US$ falls; pound up 1.5% on renewed hopes for Brexit deal

London

THE dollar fell close to two-year lows on Monday as renewed hopes for a Brexit deal and fiscal stimulus in the United States, as well as progress on Covid-19 vaccines, lifted riskier currencies.

The pound gained after the UK and European Union agreed on Sunday to continue Brexit talks and the EU's chief negotiator said a deal was still possible.

At 1220 GMT, the pound was up 1.5 per cent versus the dollar, at US$1.3423 - a jump from its low point of US$1.3135 on Friday . Versus the euro, it was up around 1.1 per cent at 90.535 pence .

"Despite being a very close call at this stage, we still think a deal is the most likely scenario and therefore expect a sterling rally to materialise in the next two weeks," ING strategists wrote in a note to clients. "Still, the currency reaction function is asymmetrically skewed to the downside as, despite last week's drop, the pound is still pricing a good probability of a deal," they added.

Wall Street was set to open higher, after the US began its first shipments of the Covid-19 vaccine to distribution centres on Sunday, raising hopes for a swift recovery from the global virus-induced economic downturn.

The dollar was down around 0.3 per cent against a basket of currencies at 90.534 at 1222 GMT, staying within December's ranges but not far from its lowest since 2018.

"The expectations of a deal in the UK has actually helped risk sentiment globally," said Neil Jones, head of FX sales for financial institutions at Mizuho. He said that hopes for a fiscal stimulus deal in Washington were also boosting market sentiment.

A US$908 billion bipartisan Covid-19 relief plan, will be split into two packages in a bid to win approval, a person briefed on the matter said.

The risky Australian and New Zealand dollars were also up, with the New Zealand dollar reaching its strongest since April 2018, at 0.712.

At 1222 GMT, the Aussie - a liquid proxy for risk - was up 0.4 per cent versus the dollar at 0.75685.

The euro rose around 0.4 per cent versus the dollar, at US$1.21545.

New virus restrictions on activity in Europe - including a strict lockdown in Germany - had limited market impact.

Elsewhere, China's yuan rose against the dollar as market participants shrugged off an attempt by the Chinese central bank to stem yuan appreciation by reducing capital inflows.

At 1223 GMT, the dollar was down around 0.2per cent on the day versus the offshore yuan, at 6.5251.

For the week ahead, market participants will focus on a series of central bank meetings, including the US Federal Reserve on Wednesday and the Bank of England on Thursday. REUTERS