LONDON: The US dollar fell on Tuesday despite rising worries about a second wave of Covid-19 infections, as investors sat on the sidelines ahead of next week's US election. Monday saw the steepest stock market sell-off in a month and a bond rally, but foreign exchange market activity has remained relatively muted, with price moves on Tuesday limited.
That said, analysts warned investors were clearly cautious after the United States, Russia and France all hit new daily records for Covid-19 infections. They said prices were not moving much because of a reluctance to build positions before the US presidential election on Nov. 3. After initially falling, the euro was up 0.2% by 1215 GMT to $1.1829.
The dollar index, which measures the greenback against a basket of major currencies, weakened 0.2% to 92.883. The yen and the Swiss franc, both of which investors tend to buy when nervous, were mixed.
"Many sources of uncertainty are still preventing clearer trends from emerging," UniCredit analysts said in a research note.
"The impasse on both US budget talks and Brexit negotiations, as well as the implications of rising Covid-19 infections on 4Q20 GDP growth, play in favor of more euro-dollar and sterling-dollar stabilization for now," they said, pointing to levels of "just above $1.18 and $1.30, respectively."
The usually risk-sensitive Australian and New Zealand dollars gained. The yuan weakened after Reuters, citing sources, reported that China's central bank had neutralised the counter-cyclical factor in its daily yuan midpoint fixing in a move to let the fixing more closely reflect actual market moves.
The offshore yuan then rebounded and was last at 6.6950, leaving the dollar up 0.1%. The European Central Bank meets on Thursday but analysts say market reaction will be limited.
"Like most of us, ECB policymakers are in stasis. Triggering a big market response so close to an important US election would be tough regardless of the financial and economic backdrop," said Stephen Gallo, European head of FX strategy at BMO Capital Markets.
A week ahead of the US election, national polls give Democrat Joe Biden a solid lead but the contest is much tighter in battleground states that could decide the outcome. Analysts regard a Biden victory, and especially Democratic control of the Senate, as negative for the dollar since it is expected to deliver big stimulus spending that would drive demand for riskier currencies.
Sterling slipped overnight but was back above $1.30 on Tuesday at $1.3048 as negotiations between Britain and the European Union over a Brexit trade deal continued. It was marginally higher versus the euro at 90.655 pence.