Dollar firm on Covid woes, US election uncertainty

Dollar holds firm on Covid-19 woes and US election uncertainty

The dollar index, which measures the greenback against a basket of currencies, edged slightly higher to 93.121

Representative image. Credit: iStock.

The US dollar clung to gains on Tuesday, but other safe-haven currencies were mostly quiet as investors sat on the sidelines ahead of next week's US election, even as worries about a second wave of Covid-19 and economic impact rose.

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 in early Tuesday limited.

That said, analysts warned investors were clearly cautious after the United States, Russia and France all hit new daily records for coronavirus infections. They said prices were not moving much because of a reluctance to build positions in the run-up to the US Presidential election on Nov. 3.

Euro-dollar was last at $1.18045, little changed on the day.

The dollar index, which measures the greenback against a basket of currencies, edged slightly higher to 93.121.

The yen and the Swiss franc, both of which investors tend to flock towards when nervous, inched higher .

"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 dipped only slightly overnight and were stronger in early European trading.

Sterling slipped overnight but was back above $1.30 on Tuesday at $1.3020. It was marginally lower versus the euro at 90.79 pence.

National Australia Bank senior FX strategist Rodrigo Catril said many investors did not want to take on new positions before the US election.

"I think many would probably remember the bad experiences we had going in to the Trump-Clinton election (in 2016)," said Catril.

"If you had a position on, you would have been whipsawed big time. I think the strategy this time is to travel light, and to choose the opportunity on the day rather than take on a very, very strong position going into the election."

A week out from polling day, 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 Democrat control of the Senate, as negative for the dollar since it is expected to deliver big stimulus spending that would boost investor sentiment and drive demand for riskier currencies.