Dollar Weakens on Vaccine Optimism

The dollar weakened in early European trade Monday, with optimism over a potential early rollout of Covid-19 vaccines prompting demand for riskier assets.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 92.248, just above the month’s low of 92.129.

EUR/USD climbed 0.1% to 1.1870, USD/JPY fell 0.1% to 103.81, while the risk sensitive AUD/USD rose 0.2% to 0.7317.

Promising news on vaccines have been weighing on the safe-haven dollar over the last week. This continued on Sunday, when the chief scientific adviser for “Operation Warp Speed” Moncef Slaoui said the U.S. Food and Drug Administration could grant approval of Pfizer’s candidate in mid-December, with the first people in the United States potentially receiving a vaccine the day after.

The good news continued Monday as it was announced that the Covid-19 vaccine developed by AstraZeneca (NASDAQ:AZN), in conjunction with the University of Oxford, was up to 90% effective in preventing the Covid-19 virus if patients were given an initial half dose, followed by a full dose. AstraZeneca’s drug is reportedly capable of being stored without specialist refrigeration, which makes it especially important for emerging markets with less developed healthcare systems.

This news comes just before this week’s Thanksgiving holiday, when millions of Americans are expected to travel to visit family and friends, with all that that implies for heightened transmission risks.

Also weighing on the dollar is the idea that the Federal Reserve might have to ease monetary policy further to cope with the increased shutdowns on the back of the rising number of Covid-19 cases, particularly with no fiscal stimulus deal in sight and after last week’s surprise move by the Treasury Secretary Steven Mnuchin to end some emergency lending programs.

“Mnuchin has vetoed against prolongations of some of Fed’s crisis programs, but he may instead end up incentivizing the Fed towards a big Operation Twist and more asset purchases,” said analysts at Nordea, in a research note.

Key forward-looking U.S. manufacturing and services PMI data will be in focus later in the session to try and gauge the extent of the economic hit from the restrictions caused by the latest Covid-19 outbreak.

Elsewhere, GBP/USD rose 0.4% to 1.3329, helped by the AstraZeneca vaccine news. Addiitionally, U.K. Chancellor of the Exchequer Rishi Sunak said Sunday that he is optimistic that a Brexit trade agreement with the European Union will be reached soon.

Still, even if the UK-EU trade deal is reached, “the lack of risk premia priced into GBP suggests only a limited upside,” said analysts at ING, in a research note.

“However, with politics and the U.K.-EU relationship uncertainty taking a less prominent role next year, this should allow GBP to benefit from the weak USD dynamics, sending GBP/USD above 1.40 in 2021.”

The pound was also edging higher against the euro, testing the five-month high it notched earlier this month.