Dollar plumbs two-year lows as stimulus, vaccine hopes boost risk appetite

LONDON: The dollar index hit its lowest in more than two years on Thursday, while the euro rose above $1.21 as signs of progress towards U.S. fiscal stimulus and optimism about vaccines made investors more ready to move funds to riskier assets.

Lawmakers in Washington have failed to reach an agreement on economic stimulus to help relieve the impact of COVID-19 in the United States, but there were early signs that a $908 billion bipartisan proposal could be gaining traction.

Risk appetite was also boosted by optimism about recent developments towards the roll-out of COVID-19 vaccines. The UK approved Pfizer Inc's vaccine on Wednesday.

The dollar fell, hitting as low as 90.834 versus a basket of currencies - its lowest since April 2018.

At 0820 GMT it was at 90.890, down 0.1pc on the day.

"Additional fiscal stimulus ahead of the new President Joe Biden assuming office would lower the current downside risks for the economy and thus principally fuel inflation expectations, which will weaken the dollar in view of the Fed's long-term expansionary monetary policy targets," wrote Commerzbank FX strategist Esther Reichelt in a note to clients.

"The subject is likely to remain an important issue on the FX market for now," she said.

The euro was also at its highest in more than two years, having crossed $1.21 on Wednesday, it rose to as high as $1.21390 on Thursday. At 0826 GMT, it was at $1.2129.

The moves in the euro are largely due to dollar weakness, rather than idiosyncratic euro drivers, ING strategists wrote in a note.

The European Union is embroiled in a dispute with members Hungary and Poland over its budget and COVID-19 recovery fund. The announcement of the recovery fund plan saw the euro surge earlier this year.

"If one considers how clearly the euro benefitted from the EU countries being able to agree on the recovery fund in July it does come as a surprise that the euro is not suffering more significantly now that the project is on the brink," Commerzbank's Esther Reichelt wrote.

The Australian dollar - seen as a liquid proxy for risk - was up 0.2pc at 0.74275, its strongest since 2018.

The kiwi dollar held near recent two-and-a-half year highs, up 0.1pc on the day at 0.7075.

The Japanese yen was steady at 104.350 at 0837 GMT, while the safe-haven Swiss franc was up around 0.1pc versus the euro at 1.08305.

Market participants were waiting for PMI services data for November, released throughout the morning, to indicate the extent of the economic hit from COVID-19 in Europe.

The pound was at $1.3396, helped by the dollar weakness, as Brexit negotiations continue. Britain's education secretary said that "good progress" was being made on a deal and the Irish foreign minister said that he sees a "good chance that we can get a deal across the line in the next few days."

But options markets signalled doubts that a deal can be reached before the UK's transition period ends in four weeks' time.