How The US Dollar Could Trade This Holiday Week

The second to last week of December kicked off with losses in currencies and equities. By the end of the NY session, however, much of the weakness eased leading many investors to wonder if anything could sap the equity rally. The Dow Jones Industrial Average fell more than 400 points shortly after the NY open but ended the day up. The dollar started the day strong but gave up part of its gains as well. This is a shortened trading week but a variety of factors could influence how the dollar trades. Congress reached an agreement on a $900 billion coronavirus relief package that would keep millions of Americans from losing their jobless benefits. This is no panacea for the economy but it's a breath of fresh air after months of haggling. Unfortunately, this deal failed to lift stocks because of broader, more concerning factors.

Dollar, Money, President Of The U S A, Cash Money

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The most important of which is the mutant coronavirus strain. Over the weekend Prime Minister Boris Johnson said this new strain is 70% more infectious. This prompted the UK government to impose intense restrictions across the country including the city of London. These tier 4 restrictions prohibit residents from leaving their homes except for essential activities and gathering indoors with anyone outside of their household. Non-essential businesses have also been forced to close. Fearing the spread of this virus, countries around the world from Germany to France and Canada have raced to ban flights from the UK. So it's no surprise to see sterling fall sharply against the US dollar and euro. Another Brexit deadline has been missed as well, raising the risk of a no-deal Brexit and further losses for the currency. Brexit and coronavirus uncertainty should benefit the US dollar as investors seek safe-haven assets.

The only question is whether investors are worried about the new coronavirus strain. The media is making a big deal out of it, governments around the world are not taking chances and banning travel but based on the recovery in stocks, investors don’t share these concerns. This is due in part to UK officials saying there’s no reason to think that the vaccine won’t protect against this new fast-spreading strain. However the vaccine is new, distribution has just begun and it's just far too early to declare the vaccine effective on both strains. At any point in time, renewed uncertainty could drive the greenback higher.

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