FX reflation trades wilt on virus outbreak concerns
Safe-harbour currencies like the Japanese yen and U.S. dollar held near multi-month highs against the riskier Australian dollar and British pound on Tuesday, as fears grow that a rampant coronavirus variant could upend the global economic recovery.
LONDON: Popular reflation trades in the US$6.6 trillion a day currency markets wilted on Tuesday on fears the spreading Delta variant of the coronavirus would stymie the global recovery.
The Aussie dollar/Swiss franc cross, a favourite proxy in currency markets for economic recovery bets, fell to its lowest level since December 2020 at 0.6714 francs, extending its losses to 4per cent in the last 10 trading sessions, according to Refinitiv data.
"The price action continues to send an ominous warning signal over the global growth outlook and indicates that market participants are becoming fearful over a more notable slowdown ahead," MUFG strategists said in a daily note.
The risk-off sentiment in the currency markets reverberated far and wide with the U.S. dollar, the yen and the franc benefiting against rivals. So far this month, these three majors are the best performing currencies in global markets.
Against a basket of its rivals, the greenback strengthened widely on Tuesday and was within striking distance of an early-April high of 93.041 hit in the previous session.
The fast-spreading Delta variant of the coronavirus is now the dominant strain worldwide, and has been accompanied by a surge in infections in the United States, particularly in areas where vaccinations have lagged.
The euro weakened 0.1per cent to US$1.17845, after dipping overnight to the lowest since early April at US$1.1764 before a European Central Bank policy decision on Thursday.
The British pound was also among the top losers in early London trading with the currency declining 0.2per cent at US$1.36470 as Boris Johnson's "freedom day" - ending over a year of COVID-19 lockdown restrictions in England - was marred by surging infections.
In cryptocurrencies, bitcoin sank as low as US$29,500, a level not seen since June 22, before trading 3.4per cent lower at US$29,748.30. Rival ether dropped nearly 5per cent to US$1,730.33 before trimming some losses.
(Reporting by Saikat Chatterjee; Editing by Dhara Ranasinghe, Robert Birsel)