LONDON: The US dollar was on track for its biggest single day gain in seven trading sessions on Tuesday as coronavirus outbreaks threatened to snuff out global economic recovery with the Australian dollar and the British pound leading losses.
Fears over the spread of the highly infectious Delta variant are denting sentiment at a time markets are on edge after the Fed shocked traders with a hawkish tilt earlier this month.
Indonesia is grappling with record-high cases, while Malaysia is set to extend a lockdown and Thailand has announced new restrictions. Spain and Portugal are imposing travel restrictions on unvaccinated British travellers.
"I think it is fair to say that the rise in delta variant cases is certainly acting as a drag on sentiment, providing the potential for second half growth forecasts to be lowered and allowing risk aversion to start to impose itself again," said Stuart Cole, head macro economist at Equiti Capital.
"Any rise in risk aversion is obviously good news for the US dollar."
Against a basket of its rivals, the greenback rose 0.2% to 92.06, not far from three-month highs of 90.68 hit this month, registering its biggest single-day gain since June. 18.
The greenback's correlation with general risk appetite as seen from the global daily case loads of Covid-19 has weakened in recent weeks as market attention has been more focused on when the Fed will exit its massive policy stimulus.
But that correlation has started to strengthen since last week.
The euro declined 0.2% to $1.1900, edging back toward the 2-1/2-month low of $1.8470 touched on June 18.
"The market had been positioned long of the single currency on optimism regarding the vaccine catch-up trade in the region (but) forecasts that the Delta variant of Covid could spread through Europe (in) the summer months could now be undermining confidence in this trade," Rabobank strategist Jane Foley wrote in a report, cutting a one-month euro forecast to $1.19 from $1.20.
Elsewhere, sterling slipped back toward a two-month low, weakening 0.2% to $1.3846. The Australian dollar, seen as a liquid proxy for risk appetite, fell 0.3% to $0.75580 amid concerns over renewed Covid-19 lockdowns across parts of the country.