Dollar struggles as U.S. election uncertainty offsets COVID-19 concerns

LONDON (Reuters) – The U.S. dollar and other safe-haven currencies struggled to make headway on Tuesday despite rising worries about a second wave of COVID-19 infections, as investors sat on the sidelines ahead of next week’s U.S. election.

FILE PHOTO: A U.S. Dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

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 U.S. Presidential election on Nov. 3.

After initially falling, the euro was up 0.1% by 1130 GMT to $1.1818.

The dollar index, which measures the greenback against a basket of currencies, edged slightly lower to 92.959.

The yen and the Swiss franc, both of which investors tend to flock towards when nervous, were mixed, with the yen higher but the franc falling slightly.

“Many sources of uncertainty are still preventing clearer trends from emerging,” UniCredit analysts said in a research note.

“The impasse on both U.S. 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 traded higher.

The European Central Bank meets on Thursday but analysts are not expecting any fireworks and 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 U.S. election would be tough regardless of the financial and economic backdrop,” Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said.

A week out from the U.S. 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 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.

Sterling slipped overnight but was back above $1.30 on Tuesday at $1.3038. It was marginally higher versus the euro at 90.655 pence.

Negotiations between Britain and the European Union over a Brexit trade deal continue but analysts say the pound is unlikely to gain much should an agreement be made.

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