NEW YORK (Reuters) - The dollar retreated from a four-month high against the euro on Tuesday as risk appetite improved after a weeklong rally helped by a safe-haven bid fueled by fears over China’s coronavirus outbreak.
The S&P 500 and the Nasdaq indexes scaled new highs as investors took heart from remarks by a top Chinese health adviser that the outbreak may be peaking. [.N]
The coronavirus outbreak in China may be over by April, the country’s senior medical adviser said, even as deaths surpassed 1,000 and the World Health Organization (WHO) warned of a global threat potentially worse than terrorism.
“There’s been a bit of a disjoint with the way the equity market has been trading in the last couple of sessions and the way the FX markets have been moving, and I think to some degree we’re seeing a bit of catchup on the FX side of things,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.
Concerns about the economic impact of the coronavirus have added a safety bid for the greenback in recent sessions, while economic data has boosted the view that the U.S. economic outlook is stronger than the euro zone’s.
The dollar has also gained as low volatility across most of the foreign exchange market has encouraged investors to seek out carry trades, where they borrow in low-yielding currencies such as the euro and the franc and invest in dollars or other high-yielding currencies.
“One of the big prevailing narratives right now is for the carry trade,” said Erik Nelson, a currency strategist at Wells Fargo in New York. “As volatility seems to be nonexistent in the FX market, a lot of people are piling into this short euro, long higher beta, higher interest rate currencies.”
The euro fell as low as $1.0892 on Tuesday, the lowest since Oct. 1, before bouncing back to $1.0923.
Federal Reserve Chair Jerome Powell told Congress on Tuesday the U.S. economy is in a good place, even as he cited the potential threat from the coronavirus and concerns about the economy’s long-term health.
Data on Tuesday showed U.S. job openings dropped for a second straight month in December to hit their lowest level in two years, while hiring increased marginally, suggesting a recent acceleration in job growth was unlikely to be sustained.
Reporting by Karen Brettell; editing by Jonathan Oatis and Tom Brown