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January 07, 2021 @ 15:33 +03:00
The dollar edged higher on Thursday, hovering above its lowest levels in nearly three years on Thursday after Democrats won control of the U.S. 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 U.S. 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 U.S. 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% 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 U.S.’ 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 dollar gained 0.3% to 103.385 yen, after dipping to 102.595 on Wednesday for the first time since March. But after a fall of nearly 7% in 2020 for the dollar index and a drop of as much as 0.9% in the new year, the U.S. currency may get a degree of respite from some unwinding of a crowded trade.
Dollar hovers above 2018 lows after Democrats take control of Senate, Reuters, Jan7