Dollar hit as hopes for fiscal stimulus fuels shift to riskier assets

A decline in the dollar gathered pace, pushing the UK pound to a one-week high, after Democrats and Republicans inched closer to agreeing a second major fiscal stimulus for the world’s largest economy.

The fall in the dollar helped fuel a rise in sterling, with the UK currency rallying 0.8 per cent to $1.305. Most other major currencies including the euro and Japanese yen also climbed against the greenback, which typically comes under selling pressure when investors are shifting into riskier assets.

The dollar index, a measure of the buck against six peers, slipped 0.4 per cent to the lowest level since early September.

The hopes for a spending splurge to battle the effects of Covid-19 also spilled into the US government debt market.

Yields on benchmark 10-year Treasury notes, which move inversely to prices, added 0.03 percentage points to 0.81 per cent, their highest since early June, as investors reacted to the prospect of trillions of dollars of extra government borrowing and spending.

The White House and congressional Democrats on Tuesday claimed enough progress in talks on a $2tn fiscal stimulus package to keep negotiations alive.

US bond prices are also under pressure from the polling forecasts that President Donald Trump’s Democratic challenger Joe Biden will win next month’s election and plough even more relief funds into the pandemic-stricken economy. Yields on 30-year bonds, the long-term debt most likely to be used for infrastructure and other public works projects, added 0.03 percentage points to 1.63 per cent, also a four-month high.

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The rise in shorter-term bond yields, which anchor borrowing costs for businesses and households, will “test” the resolve of the US Federal Reserve to “keep monetary conditions extremely loose” throughout the pandemic, said John Higgins of research house Capital Economics.

Analysts therefore expect the gap between short and long-dated Treasury yields to keep widening, as the Fed pushes down the shorter end of the yield curve by ramping up its asset purchases.

Elsewhere, China’s central bank permitted the tightly controlled renminbi, which is not traded in international markets, to hit a 27-month high of 6.6 a dollar. The offshore version of the currency strengthened to the same level.

Earlier this week, China reported third-quarter GDP growth of 4.9 per cent compared with a year ago, highlighting how its economy has rebounded from the worst of the pandemic. While the People’s Bank of China fixes the range in which the currency can trade on a daily basis, it has also allowed freer trading of the renminbi in recent years, influenced by market forces.

The Australian dollar, which is viewed as a proxy for Chinese economic activity, rose 0.4 per cent to purchase $0.70.

European stock markets drifted lower on Wednesday morning, with the region-wide Stoxx 600 falling 0.3 per cent and the UK’s FTSE 100 slipping 0.5 per cent.



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