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Risk currencies take breather after rally, virus resurgence lifts dollar

United States one dollar bills at the Bureau of Engraving and Printing in Washington

Risk currencies such as the Australian dollar took a breather from recent gains on Tuesday with investors hitting pause on an equity market rally, as new coronavirus flare-ups and regional lockdowns in some countries curbed buying and lifted the dollar.

Riskier currencies such as the commodity-driven Aussie, Norwegian crown, the New Zealand dollar and the Swedish crown have rallied strongly since April alongside increased risk appetite in global markets.

But with a blazing run up in Chinese equities cooling on Tuesday, surging coronavirus infections in places that are attempting a reopening, and regional lockdowns still being introduced, investors appeared to take their foot off the gas.

Lockdown measures were reimposed in Australia’s second biggest city on Tuesday, confining Melbourne residents to their homes unless undertaking essential business for six weeks, as officials scramble to contain a coronavirus outbreak.

The Australian dollar sank 0.5% to its U.S. counterpart after the announcement, last trading at $0.6940.

It had no reaction to the country’s central bank leaving rates unchanged.

The dollar index in the meanwhile, rose 0.2% to 96.972. It gained 0.2% against the yen, to trade at 107.595 .

The Chinese yuan picked up where it left off after soaring with runaway Chinese equities on Monday, but pulled back from an offshore top of 6.9965 per dollar as caution crept in.

Florida’s greater Miami area became the latest hot spot to roll back its reopening as virus cases surged nationwide by the tens of thousands and the U.S. death toll topped 130,000.

“After yesterday’s strong risk rally – which also drove risky currencies higher – the reality of regional lockdowns in places like the US, UK, Spain and now Australia are a gentle reminder that the threat of a second coronavirus wave is one that investors should not be quick to price out,” said Viraj Patel, global FX and macro strategist at Arkera.

Investors are watching nervously as infections surge in the United States and India, but are so far taking the view that more massive lockdowns are unlikely.

The daily case count makes sombre reading, but deaths have not jumped, said Chris Weston, head of research at Melbourne brokerage Pepperstone, who is more closely watching the bond market where stubbornly low yields are driving cash elsewhere.

The yield on benchmark 10-year U.S. Treasuries has been parked at roughly 0.7% for a month, well below an early June top of 0.9590% and more than 100 basis points below where they began the year.

“If we were to suddenly see signs of a sell-off in the Treasury market, that could have big implications for where global capital sits. Until that point, it’s onwards and upwards,” Weston said. “Just do what’s working and carry on buying.”

On Tuesday, the kiwi last sat steady at $0.6554 having, like the Aussie, pulled back from testing the top of a range it has kept for about a month.

The euro sat just below a two-week high touched on Monday at $1.1311 and the pound held steady at $1.2505. The yen was flat at 107.36 per dollar.

A key measure of the market’s long-term inflation expectations in the euro area has risen from record lows hit in March and is close to its highest levels in around 4 months.

“One implication of higher inflation expectations is a further push higher in euro/dollar. The pair made it back above $1.13 yesterday and we think it has further to go in the short term,” said strategists at Danske Bank in a note to clients, adding that they saw the euro reaching $1.15 in 3 months.

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