Dollar falls; lira weakens in Europe

LONDON: The US dollar fell to a two-year low on Wednesday as pressure built on the Federal Reserve to strike a dovish policy stance amid a surge in coronavirus cases fuelling demand for riskier currencies like the Norwegian crown and the Australian dollar.

Financial markets expect policymakers to hold fire on fresh steps, but rising infection rates are leading some analysts to predict strong forward guidance from the Fed on further policy actions.

The euro traded at $1.1762, up 0.3%, although it has stepped back from Monday's 22-month high of $1.17815.

The dollar traded at 104.82 yen, a four-month low and down 0.25% on the day.

For investors, the euro's strength has been vindicated by a recent fiscal stimulus deal reached by European Union leaders last week with charts and derivatives expecting the single currency to strengthen to $1.20 levels in the short term.

Elsewhere, the Turkish lira held near record lows after it plunged 2% in minutes on Monday before reversing most of that fall. One-week and one-year Turkish lira implied volatility gauges jumped to their highest level in two months.

The weakening dollar pushed the Australian dollar higher with the currency trading at $0.7185, hitting a 15-month peak after data showed Australia's consumer prices fell by a record in the second quarter.

Against a basket of other currencies, the dollar fell 0.4% to 93.41, its lowest level since June 2018. It has weakened more than 3% since the last Fed meeting as yields on benchmark US Treasury debt have fallen more than 20 bps since then.

"Even if the Fed doesn't come out explicitly signalling more policy support, the dollar's outlook remains weak thanks to the diverging trends in coronavirus cases between Europe and the US," said Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank.

Four US states in the south and west reported one-day records for coronavirus deaths on Tuesday and nationwide cases stayed high.

"These factors mean we should expect a decidedly more pessimistic assessment of the outlook for economic growth," said Derek Halpenny, head of research at MUFG Bank. "We should also probably expect some focus on the US dollar, given the notable move we have had since the last meeting."