Dollar hits two-and-a-half year low as equity rally stalls

The dollar hit its lowest in two and a half years in early London trading on Monday while riskier currencies dipped slightly as the global equities rally paused for breath.

Global market sentiment surged in November, causing the dollar to fall and riskier currencies to benefit, as investors' risk appetite was boosted by Joe Biden's victory in the US. presidential election, a series of positive Covid-19 vaccine developments and hopes for further stimulus.

The dollar was set for its biggest monthly loss against a basket of currencies since July, having wiped 2.5% off its value in November. At 0836 GMT it was at 91.654.

The New Zealand dollar, which is on track for its biggest monthly gain since 2013, hit a new two-year high overnight, then declined steadily. In early London trading, it was flat on the day at 0.7034 versus the dollar.

"The improving outlook for global growth combined with strong signals from the Fed that it will maintain loose monetary policy well into the economic recovery have been encouraging a weaker US dollar," wrote MUFG currency analyst Lee Hardman in a note to clients.

"Asian and commodity related currencies have also been benefiting from the outperformance of China’s economy which has been leading the global recovery from the Covid-19 shock," Hardman added.

China's manufacturing grew at its fastest pace in more than three years in November, while services sector growth hit a three-year high, data on Monday showed.

The offshore yuan is on course for its longest streak of monthly gains in six years, boosted by China's economic recovery from the coronavirus and steady capital inflows.

At 0839 GMT, it was broadly flat on the day at 6.5760 versus the dollar.

The Trump administration is poised to add China's top chipmaker SMIC and national offshore oil and gas producer CNOOC to a blacklist of alleged Chinese military companies, according to a document and sources, curbing their access to US investors and escalating tensions with Beijing weeks before Biden takes office.

"The reports play into fears that President Trump will lash out at his enemies including China during his lame duck session which could trigger some short-term volatility in financial markets," said MUFG's Hardman.

Elsewhere, the euro rose to new three-month highs of $1.19830. Investors are closely watching for the key $1.20 level, after the European Central Bank signalled earlier this year that it was carefully monitoring the euro-dollar exchange rate.

Brexit negotiations remain the focus for the pound, which was steady against the euro at 89.83 pence per euro.

Britain and the European Union are running out of time to agree on a Brexit trade deal, but if good progress is made this week the talks could be extended, Britain's environment secretary said.

In focus for commodity-driven currencies such as the Norwegian crown is the OPEC+ meeting which begins on Monday.

The Australian dollar slipped slightly, down 0.1% on the day at 0.7379 at 0850 GMT.