FILE PHOTO: Pound and U.S. dollar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration
December 24, 2020
By Yoruk Bahceli
AMSTERDAM (Reuters) – Sterling extended gains on Thursday as Britain and the European Union appeared on the cusp of striking a trade deal, raising hopes the United Kingdom can avoid a turbulent economic departure at the end of the year.
The dollar was on the back foot in holiday-thinned trading as hopes for an agreement that would protect about $1 trillion in annual cross-channel trade from tariffs and quotas sapped demand for the safest assets.
The British pound extended gains and rose over 0.6% against the dollar in early London trade, to $1.3586, as Ireland’s foreign minister said a deal was expected on Thursday, with fisheries agreed in principle but details still being discussed.
Sterling also strengthened against the euro, and was last up 0.3% at 89.90 pence.
Sources in London and Brussels said a deal was close as British Prime Minister Boris Johnson held a late-night conference call with his senior ministers and negotiators pored over reams of legal trade texts.
Johnson and EU Commission President Ursula von der Leyen are expected to hold a news conference later on Thursday morning, the BBC reported.
“This time it really does appear that a deal will be struck just in time for Christmas,” Westpac macro strategist Tim Riddell told clients.
He said a deal on Thursday could push the pound up to $1.40 – a level it has not breached since 2018 – but added: “Potential for a more substantial move towards 1.4500 now seems unlikely given how positions exhaustion is so prevalent.”
The Brexit headlines overshadowed U.S. President Donald Trump’s demand for changes to a coronavirus aid bill, effectively threatening a government shutdown next week.
The safe-haven dollar slid further against a basket of currencies on Thursday, down 0.3% to 90.188 following Wednesday’s 0.3% slide. The euro strengthened 0.2% to $1.22055
Risk appetite supported other trade-sensitive currencies, with the Australian dollar up as much as 0.3% against the dollar at 76.03 U.S. cents following the previous session’s 0.8% jump.
The greenback also slipped 0.2% to 6.5185 Chinese yuan in the offshore market.
“Republicans and Democrats agreeing on the deal is positive news, and now the delay gives you an upside option of getting more – the (stimulus) bill is unlikely to get worse,” said Lauri Halikka, fixed income and FX strategist at SEB in Stockholm.
“So the near-term uncertainty is probably compensated by a chance of getting a larger bill. Further, Biden gets inaugurated in less than a month’s time, so the delay is unlikely to get any longer than that in the worst case.”
The dollar index has lost more than 6% this year as investors bet the U.S. Federal Reserve would keep its monetary policy ultra-accommodative and fiscal stimulus would speed an economic recovery in 2021. Expectations for further declines in the dollar are helping buoy stock markets and emerging-market currencies.
Even if the deal is not approved and the dollar benefits from safe-haven buying in the shorter term, it will still weaken to $1.23 per euro over the course of 2021, according to Jane Foley, head of FX strategy at Rabobank.
The yen, another safe-haven currency, was down about 0.1% at 103.615 per dollar.
Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank was ready to take new steps to make its massive monetary easing more effective and sustainable.
(This story corrects title in third para to Ireland’s foreign minister, not prime minister)
(Reporting by Yoruk Bahceli in Amsterdam; Additional reporting by Kevin Buckland in Tokyo; Editing by Pravin Char)
