Dollar Weakens as Stimulus Plan Progresses

Dollar Weakens as Stimulus Plan Progresses

The dollar drifted lower in early European forex trading on Tuesday, recoiling from earlier highs as the stimulus plan progressed.

The Dollar Index was down 0.1% at 90.965 at 3:05 AM ET (0805 GMT). It previously pushed as high as 91.063 overnight for the first time since Dec. 10.

USD/JPY added 0.1% at 105.00 and EUR/USD gained 0.1% to 1.2066. It rebounded after dropping 0.7% on Monday, the most since Jan. 15. It followed the severe drop in German retail sales for December, while the AUD/USD fell 0.1% at 0.7611.

On late Monday, risk sentiment received a boost as Democrats filed a $1.9 trillion budget measure. It was a step toward bypassing Republicans on President Joe Biden’s Covid-19 relief package. This came even as a group of Republican senators visited the White House to discuss a scaled-back $618 billion alternative plan.

Indications that the turmoil in the equity markets was on the wane also helped. This was after retail traders ganged together to buy heavily-shorted stocks such as GameStop (NYSE:GME). It was at the expense of the hedge fund industry. 

Hedge Fund

The whole turbulence surrounding this targeted attack on a hedge fund and its short position shivered across assets. It may have ignited one of the clearest de-grossing/de-leveraging weeks in a long time. This was according to analysts at Nordea in a research note.

On Monday, GameStop stock, which had been run up some 400%, slumped 30% and continued to drop in premarket trading Tuesday.

They may be tempted to buy into more risk assets again ahead of the re-opening during the spring. That is if they get a more convincing signal that this has indeed been a light positioning wash-out this week. This was an additional comment from Nordea.

Moreover, GBP/USD gained 0.2% to 1.3683. Sterling received a boost as the U.K. steps up its coronavirus vaccinations. That is to improve the chances of an economic rebound.

The U.K. has given shots of the Covid-19 vaccine to over 9 million people outpacing the U.S. and Europe.

As a result, markets have reduced their bets that the Bank of England will adopt negative interest rates. It will meet to discuss monetary policy on Thursday.

Meanwhile, the NZD/USD pair was up 0.27% to 0.7175 and the USD/CNY pair inched down 0.10% to 6.4603.

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