Dollar Weakens as Yellen Boosts Risk Appetite

© Reuters
© Reuters

By Peter Nurse – The dollar weakened in early European trade Wednesday, with risk sentiment on the rise after comments Janet Yellen, Joe Biden’s nominee for Treasury Secretary, pointed towards substantial additional fiscal spending t reflate the U.S. economy..

At 3:05 AM ET (0805 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 90.278.

was down 0.1% at 103.75, ahead of the Bank of Japan’s latest rate-setting meeting on Thursday. rose 0.2% to 1.2154, climbed 0.3% to 1.3670, while the risk-sensitive was up 0.6% at 0.7736.

Yellen appeared Tuesday in front of the Senate Finance Committee as part of her confirmation hearing, and the former Federal Reserve head urged Congress to “act big” on Covid-19 relief. 

She defended the need for President-elect Joe Biden’s proposed $1.9 trillion relief package to revive a flagging economy and protect itself against long-term scarring from the impact of the coronavirus pandemic. 

Opposition to the plan from Republican lawmakers over its cost given the already sizable budget deficit, but Yellen stated that its benefits will far exceed the costs over the long term.

“Further fiscal stimulus, along with a non-reactive Federal Reserve, should make front-end U.S. real rates even more negative and naturally weigh on the dollar,” said ING analysts, in a research note.

Attention now turns to Joe Biden’s inauguration as U.S. President in Washington, at 12 PM ET (1700 GMT), amid a strong security presence given concerns about possible civil unrest. 

In Italy, Prime Minister Giuseppe Conte won a confidence vote in the Senate late Tuesday, following on from Monday’s victory in the House, after the departure of a junior member of his coalition. However, he will continue without a solid majority in the Senate.

While this is unlikely to completely end Italian political uncertainty, it does suggest “continued limited impact on the euro and limited build-up of risk premia in the currency,” ING added. 

The European Central Bank’s latest on Thursday looms large, but changes to its monetary policy are unlikely given it delivered a hefty easing package only in December.

“The focus of Thursday’s ECB meeting will be on [President Christine] Lagarde’s comments on the future of bond purchases and the difference of opinion between hawks and doves,” said Nordea analyst Jan von Gerich.  

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