Safe-haven dollar in demand as worries over European lockdowns, U.S. taxes sap risk appetite

The safe-haven U.S. dollar approached a four-month high on Wednesday as concerns over a third COVID-19 wave in Europe, potential U.S. tax hikes and escalating tensions between the West and China sapped risk appetite.

The yen also strengthened and U.S. Treasuries were bid while Wall Street stocks and crude oil tumbled as investors weighed the outlook for global growth.

The dollar index rose to a two-week high at 92.436 in the Asian session, approaching a four-month top of 92.506 hit earlier this month.

The gauge “looks determined to test the top end of a new, higher 91-93 range we think will form in coming weeks,” Westpac strategists wrote in a client note.

“Extended European lockdowns have sapped confidence in a synchronised global rebound; meanwhile, the U.S. will have an impressive rebound in coming months amid a strong vaccine roll-out, stimulus payments and economic reopenings,” they said.

The euro edged toward a four-month trough below $1.18355 - trading as low as $1.18360 - after Germany extended a lockdown and urged its citizens to stay at home during the Easter holiday.

Worries over the pace of the pandemic recovery were heightened after a U.S. health agency said the AstraZeneca Plc vaccine may have included outdated information in its data.

The flight to safety received an additional nudge when Treasury Secretary Janet Yellen told lawmakers that future tax hikes will be needed to pay for infrastructure projects and other public investments.

Yellen was testifying to the House Financial Services Committee along with Federal Reserve Chair Jerome Powell, who reiterated that an expected near-term spike in inflation will be transitory.

That helped tame U.S. Treasury yields, with the benchmark sinking below 1.6% on Wednesday for the first time in a week, as it continued its retreat from a more than one-year high of 1.7540% touched last week.

Both Yellen and Powell are also scheduled to testify to the Senate Banking Panel on Wednesday.

Human rights sanctions on China imposed by the United States, Europe and Britain, which prompted retaliatory sanctions from Beijing, are adding to market concerns.

The safe-haven yen was broadly stronger, and Australias dollar - considered a liquid proxy for risk - weakened further on Wednesday.

The Aussie slipped to as low as $0.7595, a level not seen since Feb. 5, and to 82.41 yen for the first time since the start of this month.

The British pound weakened as far as $1.37050, also the lowest since early February.

In cryptocurrencies, bitcoin languished below $54,000, less than two weeks since hitting a record high of $61,781.83.

Seasonal factors are likely exacerbating currency moves, as some investors lock in profits ahead of the quarter-end and the holidays of Easter and Passover, according to Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“The main scenario for the market, that the global economy is recovering from the pandemic shock, is intact,” he said.

“We may see more of a correction into the start of April, but after that I expect a restarting of a risk-on trade,” with commodity currencies of advanced economies benefitting most, he said.

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