Dollar nears 2 1/2-year lows as vaccine optimism grows

LONDON: The U.S. dollar fell towards a two-and-a-half-year low on Wednesday as progress in combating the COVID-19 pandemic boosted risk appetite and prospects of more U.S. fiscal stimulus weakened the U.S. currency.

Riskier currencies, including the Australian dollar and the Chinese yuan, led gains against the dollar in London trading after three days of gains.

With U.S. coronavirus cases exceeding 15 million on Tuesday, regulators moved a step closer to approving a COVID-19 vaccine, while Britain started inoculating people on Tuesday.

Investors are also tracking negotiations over U.S. coronavirus aid, with the Trump administration proposing a $916 billion package on Tuesday after congressional Democrats rejected a slimmer plan.

"There hasn't been any real breakthrough in the stimulus talks, but it does appear that both sides are prepared to pour water in their wine and soften their demands," said Marios Hadjikyriacos, an investment analyst at XM.

Against a basket of currencies, the dollar fell 0.2pc to 90.70. It reached an April 2018 low of 90.47 last Friday.

The dollar's losses have been most severe versus the euro in recent weeks as economic activity data suggest Europe is outperforming the United States in recent weeks.

The dollar weakened 0.2pc against the euro to $1.2126 and is heading for an annual loss of 8pc against the common currency, its largest since 2017.

German investor sentiment rose in December on expectations that vaccines against the coronavirus will boost the economic outlook, a survey showed this week.

RISING YUAN

The dollar dropped to 6.5198 yuan in onshore trading, its lowest since June 2018, putting the yuan up by more than 10pc from its May lows, boosted by the softer dollar and steady inflows into Chinese stocks and bonds.

Sterling was volatile in trading, up 0.7pc at $1.3451 before a Wednesday dinner between British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen in Brussels that is seen as a last-ditch attempt to salvage a Brexit trade deal.

Rumblings in the money markets grew with swap markets indicating a growing demand for dollars heading into the end of the year.

Three-month euro cross-currency basis swap spreads widened to minus 32 bps, well below a March peak of nearly minus 90 bps.