Dollar Edges Lower; Stimulus Package and Fed Meeting in Focus

The dollar eased lower in early European trading Monday, with risk sentiment still buoyed by expected stimulus ahead of this week’s Federal Reserve meeting.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 90.085, having fallen 0.7% in the last week.

USD/JPY was down 0.1% at 103.71, while the risk-sensitive AUD/USD was up 0.3% at 0.7738.

Investors still remain hopeful the $1.9 trillion stimulus package proposed by U.S. President Joe Biden will be passed by Congress in the near future, despite concerns that Senate Republicans could use filibusters to frustrate a large part of it, due to concerns about its size.

The addition of this stimulus is seen boosting the U.S. economy, helping risk sentiment to the detriment of the dollar as the Federal Reserve remains in an extremely accommodative mood.

Analysts at ABN Amro have lifted their U.S. growth forecast, and now expect growth of 5.8% in 2021, from 3.2% previously. They cite three main factors for this decision: significantly more fiscal support; lighter lockdown restrictions in Q4 and Q1; and higher spending on infrastructure and renewable energy.

The Federal Reserve meets for its first policy meeting of 2021 on Tuesday, a two day affair with the policy decision to be handed down on Wednesday. The central bank is expected to maintain its commitment to accommodative monetary policy during the meeting.

“Treasury Secretary nominee Janet Yellen is still talking about the risk of doing too little on the fiscal side and with a Fed very much focused on inclusive growth, it would seem unlikely that the Fed will want to generate any tighter financial conditions” by raising the prospect of tapering its bond purchases, said analysts at ING, in a research note.

Elsewhere, EUR/USD only gained marginally against the weaker dollar, up 0.1% at 1.2181, amid political uncertainty in Italy with Prime Minister Giuseppe Conte struggling to drum up a ruling majority in the country’s parliament.

The Italian press has suggested that Conte is close to resigning to then later form a new government that can hopefully count on a wider majority. He needs a majority to push through legislation to tackle one of Europe’s worst coronavirus epidemics and the economic crisis it has triggered.

Sterling showed some strength Monday, with GBP/USD gaining 0.2% to 1.3714 and EUR/GBP dropping 0.2% to 0.8880, helped by the U.K.’s relatively rapid distribution of Covid-19 vaccines.

Britain has immunized around five times as many people as a proportion of its population than the European Union, a divergence that helped drive the U.K currency to an eight-month high versus the euro in the past week.