Dollar hovers above 2018 lows after Capitol chaos

LONDON, Jan 7: The dollar edged higher on Thursday, hovering above its lowest levels in nearly three years on Thursday after Democrats won control of the US Senate, clearing the way for possible larger fiscal stimulus under President-elect Joe Biden.
Currency markets were largely unperturbed by scenes of chaos in Washington after supporters of outgoing President Donald Trump stormed the US Capitol on Wednesday.
Analysts generally assume a Democrat-controlled Senate would be a net positive for economic growth globally and thus for most risk assets, but negative for bonds and the dollar as the US budget and trade deficits may widen further.
"The key narrative is that we should see higher inflation on the back of stronger fiscal stimulus after the Democrats gain control of the Senate," said Francesco Pesole, FX strategist at ING in London.
"In the longer-term the implications for the dollar on higher inflation should be negative."Thursday's lift in the dollar was on the back of some safe-haven buying, Pesole said, and reiterated ING's bearish view for the dollar in 2021.
The dollar index rose 0.2 per cent to 89.567 in early London trade, but not far off its overnight low of 89.206, a level not seen since March 2018.
In a note to clients, BCA Research said that with the Federal Reserve standing still, the boost to growth from stimulus would likely lift inflation expectations, putting downward pressure on real interest rates.
They added that stronger spending should cause the US' current account deficit to widen further.
"Scandinavian currencies, the Mexican peso and north Asian EM FX stand to reap the greatest benefits from these trends, even if at first, the dollar could stage a short-lived rebound."
The Australian dollar slipped 0.3 per cent to 77.792 US cents after touching a nearly three-year high of 78.195 on Wednesday.
The euro was down 0.2 per cent at $1.23030, after climbing to $1.2349 on Wednesday for the first time since April 2018.
The dollar gained 0.3 per cent to 103.385 yen, after dipping to 102.595 on Wednesday for the first time since March.
But after a fall of nearly 7 per cent in 2020 for the dollar index and a drop of as much as 0.9 per cent in the new year, the US currency may get a degree of respite from some unwinding of a crowded trade.    -Reuters