Hedge funds spur dollar demand in Europe

The dollar held near a four-month high on Wednesday on growing hopes the spread of the coronavirus had slowed, encouraging hedge funds to step up purchases of the relatively higher-yielding greenback.

A Nomura analysis showed trend-following investors, or CTAs' as they are popularly known, have stepped up dollar buying at a rapid clip in recent days, buying the greenback against a broad range of currencies.

Across mainland China 2,015 new cases of coronavirus were confirmed as of Tuesday, the lowest daily rise since Jan. 30. China's senior medical adviser also said the outbreak might be over by April.

The slowdown in the number of new cases encouraged investors to resume seeking yields. The dollar has benefited from that approach, thanks to its relatively high interest rates. Spreads between US and German 10-year bond yields, for example, are holding at more than two-year highs above 200 basis points.

Though market watchers remain sceptical about the dollar's outlook in the near term before a US election in November and the central bank's broadly accommodative policy stance, the environment remains supportive.

"The US economic data is still superior to other economies' and the growth gap with the rest of the world remains substantial," said Ugo Lancioni, portfolio manager of the Neuberger Berman Macro Opportunities FX Fund.

Citigroup's economic surprise index for Europe has slumped to a four-month low, while a similar gauge for the United States jumped to a five-month high after dismal German industrial data and strong US jobs figures last week.

"The steady improvement in risk appetite is helping markets, and expectations that central banks will not rush into tightening policy anytime soon is also boosting sentiment," said Manuel Oliveri, an FX strategist at Credit Agricole in London.

Against a basket of major currencies, the dollar edged 0.1% higher to 98.77, just below a four-month high of 98.95 hit in the previous session.

The coronavirus epidemic has upended China's economy, the world's second-largest. In foreign-exchange markets, export-oriented currencies such as the Norwegian crown and Swedish crown have come under some pressure as the virus spread.

Wednesday offered some respite from the selling with the Norwegian crown advancing 0.3% versus the US dollar and 0.4% against the euro.

With data suggesting the near-term growth outlook to remain upbeat, the crown may gain in the coming weeks after a 5% drop in the opening weeks of 2020.

The New Zealand dollar jumped 0.8% to $0.6462, its biggest rise in two months, after the central bank removed the chance of a rate cut from its forward projections.

Recession fears in Europe dragged the euro to a four-month low overnight. It recovered to trade flat at $1.0915.