Dollar Edges Higher. But Underlying Direction is South

The dollar edged higher in early European trade Tuesday, gaining some ground as the more risk-averse sought a safe haven following news of Johnson & Johnson’s setback with its Covid-19 vaccine candidate.

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up just 0.1% at 93.227, regaining a little ground after falling Friday to a three-week low of 92.997.

Elsewhere, EUR/USD dropped 0.2% to 1.1785, USD/JPY was up 0.1% at 105.37, while the risk-sensitive AUD/USD fell 0.4% to 0.7179.

Johnson & Johnson (NYSE:JNJ) said late Monday it had temporarily paused its Covid-19 vaccine candidate clinical trials due to an unexplained illness in a study participant, delaying one of the highest profile efforts to contain the global pandemic.

In September, rival AstraZeneca (NYSE:AZN) paused late-stage trials of its experimental coronavirus vaccine, developed with the University of Oxford, also due to an unexplained illness. While trials in the U.K., and elsewhere, have resumed, the U.S. trial is still on hold pending a regulatory review.

That said, the dollar gains are small and the overall tone remains positive for risk as polls are tending to suggest a clear-cut presidential election victory for Democrat candidate Joe Biden. The market is expecting this to result in a large stimulus to shore up a pandemic-hit economy.

“Supporting risk assets and pressuring the dollar seem to be hopes for fresh U.S. fiscal stimulus and investors settling into a view that the Presidential election outcome will not be contested,” said analysts at ING, in a research note.

“We don’t expect these views to be challenged too harshly in the week ahead since the second Presidential TV debate looks to be delayed and neither party in Congress wants to be seen killing stimulus prospects.”

Elsewhere, GBP/USD traded 0.2% lower at 1.3041, still above the key 1.30 level as hopes for a Brexit deal offset concern about pressure on the economy from new coronavirus restrictions. EUR/GBP dropped 0.1% to 0.9037, near its weakest levels in two weeks.

“This Thursday’s EU summit is Prime Minister Boris Johnson’s self-imposed deadline for a trade deal, but we expect the deadline to be breached and negotiations to continue in the coming weeks,” said ING.

“GBP net-short positioning does offer some position-squaring upside room, but it’s key to note that the size of GBP shorts is still small compared to other periods where a no-deal outcome appeared as a serious risk.”

Also, USD/CNY was largely flat at 6.7471, with China currency’s recent bout of weakening, on the back of the central bank lowering the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading, halted by strong trade data.