Euro holds firm as U.S. stimulus hopes weigh on dollar

LONDON: The euro held ground on Tuesday, hovering near a 2-1/2 year peak as investors looked past new restrictions to fight COVID-19 and focused on the likelihood of more U.S. stimulus that would weigh on the dollar.

The single currency has rocketed 4pc since early November to its highest level since April 2018, in part because of broad-based selling of the U.S. dollar and as investors bet a vast European recovery fund package will lift the regions' economies.

Commerzbank analyst Esther Reichelt said that new restrictions in Germany to address the spread of COVID-19, rather than weigh on the euro were actually boosting its allure versus the dollar.

"A strict lockdown in Germany and the resulting economic effects are further going to support all those who do not expect inflation to pick up in the euro zone in the foreseeable future. And that is exactly what is supporting the euro," she said.

The euro was last at $1.2135, little changed on the day.

The dollar index, which measures the greenback against a basket of currencies, rose slightly to 90.802.

On Monday the dollar sunk as low as 90.419, a level unseen since April 2018.

The dollar has been weakened by hopes that U.S. lawmakers can agree $1.4 trillion in spending.

A $908 billion bipartisan COVID-19 relief plan will be split into two packages, a person briefed on the matter said, raising hopes that at least a large part of the plan that already has bipartisan support will be approved.

Elsewhere, sterling's Monday surge -- triggered by news Britain and the European Union would keep on talking to try and seal a Brexit trade deal -- fizzled and the pound was last down 0.3pc at $1.3290.

The Aussie slipped 0.1pc to $0.7512 after touching the highest since June 2018 at $0.7578 on Monday.

"The big picture is that 2021 looks increasingly promising for global growth, and while the U.S. will certainly be a part of that, the global reflation trade is going to support the risk-sensitive currencies like the Australian dollar," said Westpac currency analyst Sean Callow.

"The dollar is likely to be in the group of laggards, along with the likes of the yen."