Dollar weakens as investors keep attention on US stimulus talks

US stocks slipped and a decline in the dollar gathered pace on Wednesday as Democrats and Republicans inched closer to agreeing a second major fiscal stimulus for the world’s largest economy.

The S&P 500 index ended the day 0.2 per cent lower, after fluctuating between gains and losses earlier in the session. The tech-heavy Nasdaq Composite closed down 0.3 per cent.

The mixed session on Wall Street came after Nancy Pelosi, the Democratic speaker of the House of Representatives, and Treasury secretary Steven Mnuchin headed into their latest talks about a major relief package to help US businesses and households through the coronavirus pandemic.

Earlier on Wednesday White House economic adviser Larry Kudlow said in a television interview with CNBC that negotiations were moving in “a favourable direction”. “There’s a sense of optimism,” he added.

On Tuesday evening both sides reported that they had made enough progress to keep the potential $2tn bailout alive, although nothing was expected to be signed before next month’s presidential election.

Meanwhile, the dollar index, a measure of the greenback against six peers, fell 0.5 per cent to its lowest level since early September.

The fall in the dollar helped sterling, which has been volatile as post-Brexit trade talks near their conclusion, rising 1.6 per cent to $1.3145, its strongest level in six weeks. Sterling was given a further leg up following a Bloomberg report that said Brexit talks were set to resume. Boris Johnson, the UK prime minister, last week broke off trade negotiations with Brussels.

Trevor Greetham, a strategist at Royal London, said there was “imminent event risk around the Brexit deal but traders don’t know which way to jump”.

Most other major currencies, including the euro and Japanese yen, also climbed against the greenback in anticipation of a forthcoming US relief package.

“Every time the market gets more confident in additional near-term stimulus, the dollar takes a step lower,” said Christopher Jeffery, investment strategist at Legal & General Investment Management.

Jim Leaviss, head of fixed income investing at fund manager M&G, said investors were eyeing the dollar warily ahead of the US election. This was because the currency could be sold off “heavily” if President Donald Trump lost but did not immediately concede defeat, as he had signalled he might do, Mr Leaviss added. 

European stock markets fell on Wednesday. The region-wide Stoxx 600 slipped 1.3 per cent while London’s FTSE 100 slid 1.9 per cent, with exporting sectors among the worst hit.

Hopes for a spending splurge to battle the effects of Covid-19 also spilled into the US government debt market. Yields on benchmark 10-year Treasury notes, which move inversely to prices, added 0.02 percentage points to 0.80 per cent — trading around their highest levels since early June.

US bond prices are also under pressure from polling forecasts that Democratic candidate Joe Biden will win the election and plough more relief funds into the pandemic-stricken economy.

Yields on 30-year bonds, the long-term debt most likely to be used for infrastructure and other public works projects, rose roughly 0.02 percentage points to 1.6 per cent, having touched a four-month high.

John Higgins, of research house Capital Economics, said that while the rise in shorter-term bond yields, which anchor borrowing costs for businesses and households, would “test” the resolve of the US Federal Reserve, he expected the central bank to “keep monetary conditions extremely loose”.

Elsewhere, China’s central bank permitted the tightly controlled renminbi, which is not traded in international markets, to hit a 27-month high of Rmb6.64 against the dollar. The offshore version of the currency strengthened to around the same level.

This week China reported third-quarter gross domestic product growth of 4.9 per cent compared with a year ago, highlighting how its economy had rebounded from the worst of the pandemic.

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