By Gertrude Chavez-Dreyfuss and Saikat Chatterjee
NEW YORK/LONDON (Reuters) – The U.S. dollar rose on Tuesday to a one-week peak, on track for its largest single daily gain in about two weeks, as new coronavirus outbreaks threatened to derail a global economic recovery with the Australian dollar and the British pound leading losses.
A decline in risk appetite benefits the dollar as a safe haven.
Fears over the spread of the highly infectious Delta variant of the virus are denting sentiment at a time markets are on edge after the Federal Reserve shocked traders with a hawkish tilt earlier this month.
Indonesia is grappling with record-high cases, while Malaysia is set to extend a lockdown and Thailand has announced new restrictions. Spain and Portugal are imposing travel restrictions on unvaccinated British travellers.
“There is an extra layer of uncertainty in the global recovery with economies like South Africa, Australia, and parts of Asia with their lockdown restrictions because of the Delta variant,” said Simon Harvey, senior FX market analyst at Monex Europe in London.
“We went from a certain and stable background in Q2 to a lot more uncertainty going forward and markets have to price that,” he added.
In late morning trading in New York, the dollar index, a gauge of its value against six major rivals, rose 0.6% to 92.124, on course for its biggest percentage gain since mid-June.
The greenback’s correlation with general risk appetite as seen from the global daily case loads of COVID-19 has weakened in recent weeks as market attention has been more focused on when the Fed will exit its massive policy stimulus. But that correlation has started to strengthen since last week.
The dollar also got a boost after data showed U.S. consumer confidence increased in June to its highest level since the COVID-19 pandemic started more than a year ago. That boosted expectations for strong economic growth in the second quarter.
The euro declined 0.3% to $1.1892, edging back toward the 2-1/2-month low of $1.1847 touched on June 18.
“The market had been positioned long of the single currency on optimism regarding the vaccine catch-up trade in the region (but) forecasts that the Delta variant of COVID could spread through Europe (in) the summer months could now be undermining confidence in this trade,” Rabobank strategist Jane Foley wrote in a report, cutting a one-month euro forecast to $1.19 from $1.20.
Elsewhere, sterling slipped back toward a two-month low, weakening 0.4% to $1.3825.
The Australian dollar, seen as a liquid proxy for risk appetite, fell 0.6% to US$0.7520 amid concerns over renewed COVID-19 lockdowns across parts of the country.
Graphics: Global COVID cases – https://fingfx.thomsonreuters.com/gfx/mkt/xegpbzmlypq/Global%20COVID%20cases.JPG
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saikat Chatterjee in London; Editing by Steve Orlofsky and Emelia Sithole-Matarise)