Risk currencies ease after rally and virus flare-ups

London

RISK currencies such as the Australian dollar took a breather from recent gains on Tuesday, with investors hitting pause on a China-led equity market rally, as new Covid-19 flare-ups and local lockdowns in some countries lifted the safe-haven greenback.

Riskier currencies such as the commodity-driven Aussie, Norwegian krone, the New Zealand dollar and the Swedish krona have rallied strongly since April alongside increased risk appetite in global markets.

But with a blazing run-up led by Chinese equities cooling in other stock markets on Tuesday, surging Covid-19 infections in places that are attempting a reopening, and regional lockdowns still being introduced, investors appeared to take their foot off the gas.

Lockdown measures were reimposed in Australia's second biggest city on Tuesday, confining Melbourne residents to their homes unless undertaking essential business for six weeks, as officials scramble to contain a novel coronavirus resurgence.

The Aussie dollar sank 0.65 per cent to its US counterpart after the announcement, last trading at US$0.6928. It had no reaction to the country's central bank leaving rates unchanged.

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The US dollar index, meanwhile, rose 0.3 per cent to 97.009. It gained 0.3 per cent against the Japanese yen, to trade at 107.71.

The index, which measures the greenback against a basket of currencies, breached a key technical indicator this week. Known as a death cross, the chart formation occurs when a measure's long-term 200-day moving average has fallen below its short-term 50-day moving average. It last occurred for the dollar index in December 2019, following which it shed more than 3 per cent.

Florida's greater Miami area became the latest hotspot to roll back its reopening as virus cases surged nationwide by the tens of thousands and the US death toll topped 130,000.

"After yesterday's strong risk rally - which also drove risky currencies higher - the reality of regional lockdowns in places like the US, UK, Spain and now Australia are a gentle reminder that the threat of a second coronavirus wave is one that investors should not be quick to price out," said Viraj Patel, global FX and macro strategist at Arkera.

Investors are watching nervously as infections surge in the United States and India, but are so far taking the view that more massive lockdowns are unlikely. REUTERS