Dollar slips; markets in wait-and-see mode before U.S. debate

LONDON (Reuters) – The dollar index slipped from recent two-month highs on Tuesday, as markets waited for the first debate between the U.S. presidential candidates, signs of progress in U.S. fiscal stimulus talks, and economic data including German inflation.

FILE PHOTO: U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking

After racking up its biggest weekly gains since early April last week as markets turned cautious and sought safer assets, the dollar gave up some gains on Monday and edged down further on Tuesday, ahead of the debate between President Donald Trump and Democratic challenger Joe Biden.

The 90-minute televised debate at 9 p.m. ET (0100 GMT) will be watched by investors looking for a steer on the candidates’ prospects.

ING strategists told clients in a note that a rise in Trump’s perceived chances was likely to boost the dollar, “although the non-negligible risk of a contested outcome (along with the ultra-dovish Fed) may keep the dollar’s upside somewhat capped in the run-in to the vote”.

Commerzbank FX and EM analyst You-Na Park-Heger said the question of whether Trump would accept the result if he was defeated, or instead trigger a period of uncertainty, was in fact the decisive factor for the dollar.

“The debate is unlikely to provide any new insights in this respect and we therefore do not expect it to move EUR-USD in a major way,” she wrote.

At 1104 GMT, the dollar was at 94.033 against a basket of currencies, down around 0.1% on the day =USD.

Craig Erlam, senior market analyst at OANDA, said that the dollar rebound could continue in the short term, and that Tuesday’s pause could be due to month-end profit-taking, as investors wait until after the debate to enter new positions.

“I think there is going to be an overall view of ‘step aside’ as far as today is concerned – sit on the fence, let’s just see how this evening unfolds,” he said.

European shares were down, but riskier currencies strengthened, a move that OANDA’s Erlam said was driven by the dollar.

The New Zealand dollar was up 0.5% at 0.6583 NZD=D3 and the Australian dollar up 0.6% on the day at 0.71135 AUD=D3 – both recovering from sharp falls last week.

The yen was steady against the dollar at 105.615 at 1055 GMT JPY=EBS.

Markets were also waiting for developments in talks over aid for people affected by the coronavirus in the United States.

U.S. House of Representatives Speaker Nancy Pelosi said on Monday that Democratic lawmakers were unveiling a new $2.2 trillion fiscal stimulus bill, which she said was a compromise and less costly as it covers a shorter period of time.

The pound strengthened, boosted by hopes for a Brexit deal and the Bank of England’s deputy governor saying he thought the floor for the central bank’s key interest rate was 0.1%.

The euro was up 0.2% on the day at $1.1687 EUR=EBS, while the Swiss franc was steady against the euro at 1.0786 EURCHF=EBS.

European Central Bank policymakers are increasingly divided over how to steer Europe’s economy through a second wave of COVID-19 infections.

More than 1 million people have died globally due to the coronavirus.

German inflation data for September is due at 1200 GMT and is expected to come in at -0.1%, according to a Reuters poll.

“Barring a negative CPI read in Germany, EUR/USD should test 1.1700 today ahead of the US Presidential debate as improved sentiment may take some support off the USD,” ING wrote.

U.S. consumer confidence data for September is due at 1400 GMT.

(Graphic: Dollar index – tmsnrt.rs/3cFr56A)

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