Dollar Edges Higher; Risk Events Prompt Safe Haven Demand

The dollar edged higher Monday, clinging to small gains as traders turn to the safe haven as doubts about the global economic recovery rise while Covid-19 cases surge.

At 3:55 AM ET (0755 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 90.787, not far removed from the one-month high of 90.860 seen earlier in the session.

USD/JPY was down 0.1% at 103.75, GBP/USD fell 0.2% to 1.3562, while the risk-sensitive AUD/USD was down 0.2% at 0.7686.

Trading ranges will be limited Monday, with the U.S. on holiday, but there are plenty of events ahead to cause traders to react with caution.

Friday’s U.S. core retail sales contracted 1.4% month-on-month in December, a much larger drop than expected, suggesting that consumer spending in the world’s largest economy was being impacted by the rapid growth of Covid-19 infections globally.

Additionally, concerns are growing about possible violence at President-elect Joe Biden’s inauguration on Wednesday, possibly exacerbated by the impending impeachment trial of President Donald Trump, while there is also opposition from Republicans to parts of the newly-proposed $1.9 trillion stimulus plan.

Incoming Treasury Secretary Janet Yellen is also likely to be asked her views on the strength of the greenback when she testifies on Capitol Hill on Tuesday, and is likely to reaffirm a strong dollar policy aim.

“We expect the dollar bear trend to take a breather in a week packed with risk events,” said analysts at ING, in a research note.

Elsewhere, EUR/USD dropped 0.1% to 1.2073, with the single currency likely to be under pressure this week with the ECB meeting, EU summit and Italy’s political crisis in focus.

“Little is expected of the ECB after December’s easing measures,” added ING. “However, we would expect President Lagarde to say that the ECB is ‘monitoring the exchange rate carefully’, wary of the euro’s impact on an already subdued inflation rate.”

USD/CNY rose 0.1% to 6.4857, with the mood remaining risk averse despite stronger than expected Chinese economic data.

Chinese industrial production grew 7.3% year-on-year in December, while retail sales grew 4.6% in the final quarter from a year ago. GDP grew 2.6% on the quarter in the fourth quarter, up 6.5% year-on-year.