Dollar Edges Higher; Stimulus Concerns weigh on Risk Sentiment

© Reuters.

By Peter Nurse

Investing.com - The dollar edged higher in early European trading Tuesday, as concerns over the timing and size of U.S. stimulus weighed on market sentiment ahead of a Federal Reserve meeting.

At 3:05 AM ET (0805 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.2% at 90.547.

USD/JPY was down 0.1% at 103.78, GBP/USD fell 0.4% to 1.3620, while the risk-sensitive AUD/USD was down 0.4% at 0.7675.

Risk sentiment has been boosted over the last few months, to the detriment of the safe haven dollar, by hopes of additional U.S. stimulus to boost economic growth.

Bets that the U.S. dollar keeps falling, to extend a downtrend which began last March, hit their highest in almost a decade last week, data showed.

However, doubts are starting to emerge about when and to what degree the $1.9 trillion stimulus package proposed by U.S. President Joe Biden, to be largely financed by borrowing, will be passed by Congress as some Republican lawmakers rail against the size of the bill.

At the same time, coronavirus cases are surging and U.S. economic data has pointed to a flagging pace in the recovery.

This brings this week’s Federal Reserve meeting, the first under the Biden administration, starting later Tuesday to conclude on Wednesday, into focus. The Fed has pledged to back the economy in any way it can, and rates are likely to be held steady with further commentary about the outlook for an economic revival. 

“The big question during the spring is if [Fed Chairman] Jay Powell is willing to play ball when the potential mountain of issuance hits markets. We doubt that the Fed will increase QE to accommodate the Biden-boom, not least as inflation is about to soar,” said analysts at Nordea, in a research note.

The economic data slate is relatively light Tuesday, but attention will start to focus on the release of the fourth quarter GDP figure later in the week, which is expected to show that the country’s economic recovery has weakened as it continues to fight surging numbers of COVID-19 cases. 

Elsewhere, EUR/USD fell 0.2% to 1.2108, amid continued political uncertainty in Italy. Italian Prime Minister Giuseppe Conte is expected to resign Tuesday, hoping that President Sergio Mattarella will give him a mandate to form a new government with broader backing in parliament.

This follows a junior member of Italy’s ruling coalition, led by Conte, quitting last week over the government's handling of the coronavirus crisis and economic recession.