Dollar pauses as caution returns to markets

The dollar paused on Wednesday after two straight days of losses, as money markets tempered hopes of a rapid global economic recovery from the coronavirus pandemic.

The U.S. currency was broadly flat against a basket of currencies, after earlier gains of 0.3%, as risk sentiment soured in trading in Europe.

Selling pressure hit several major currencies, including sterling and the euro, before easing, leaving both broadly unchanged by early afternoon.

The New Zealand dollar remained under pressure, down almost 1% after the country’s central bank said the balance of economic risks remains to the downside and that it is prepared to use additional monetary tools as necessary.

Analysts said caution was warranted given the risk of a second wave of COVID-19 infections, despite improved economic data, including the strongest rebound on record in German business confidence, according to data on Wednesday.

“The risk of a second wave worldwide has not been banished yet and can quickly push the FX market back into the old pattern of `risk aversion is on the up, let’s buy safe havens; i.e., the dollar’ – even under the assumption that the lockdowns imposed in that case would probably be much less severe than the first time around,” Commerzbank analysts said in a note.

The dollar index is down around 1% this week on the improving economic picture, with UK, eurozone and U.S. data earlier in the week supporting riskier currencies at the expense of the safe-haven dollar.

The International Monetary Fund will release revised global growth projections in its World Economic Outlook update on Wednesday (1300 GMT), giving traders a fresh idea of the extent of the economic damage caused by the pandemic and the likely pace of recovery.

The IMF’s last forecasts in April predicted world GDP would fall 3% in 2020.

Spiking coronavirus cases in the United States, Germany, and elsewhere are being closely watched.

“We expect over the coming couple of weeks as we get more clarity on this, state governors will be in a better position to decide how to proceed,” RBC Capital Markets’ chief U.S. economist, Tom Porcelli, said of the U.S. cases.