Dollar weakens as risk appetite rises on U.S. fiscal stimulus prospects

NEW YORK (Reuters) - The dollar dropped for a second straight session on Tuesday, with broader risk appetite turning more positive, as investors cheered comments from U.S. Treasury Secretary nominee Janet Yellen on the need for major fiscal stimulus.

FILE PHOTO: A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

The dollar’s fall came after a 2% rise so far in 2021, a gain which caught off guard many investors who had bet on a further decline following its weakness in 2020.

The greenback has been helped in January by rising U.S. Treasury yields and some investor caution about the strength of the global economic recovery from the coronavirus pandemic. But most analysts are sticking with their calls for a weaker dollar from here.

Yellen, appearing before the Senate Finance Committee on Tuesday, urged lawmakers to “act big” on the next coronavirus relief package, adding that the benefits outweigh the costs of a higher debt burden.

“It looks like risk appetite is in better support today. Expectations go back to the idea of a swift fiscal U.S. stimulus,” said Simon Harvey, senior FX market analyst at Monex Europe in London.

“There is an ongoing understanding that there is support for a large fiscal stimulus and wide bipartisan support in the Senate, as opposed to a lengthy reconciliation process,” he added.

Yellen also said the dollar’s value should be determined by market forces, adding that the United States should oppose attempts by other countries to artificially manipulate currency values to gain trade advantage.

That contrasts with outgoing Republican President Donald Trump, who often railed against dollar strength.

The dollar index, which measures the currency against a basket of other currencies, dropped 0.3% to 90.506, but it was still above its more than 2-1/2-year low of 89.206 touched at the start of this month.

Graphic: U.S. dollar index

U.S. dollar net shorts have swelled to its largest since May 2011 in the latest week, which could mean a pullback in selling the greenback amid extreme positioning levels.

With the dollar weakening, the euro gained, rising 0.4% to $1.2134.

The single currency was unaffected by Italian Prime Minister Giuseppe Conte’s facing a confidence vote to stay in office. Conte’s government appeared to be on course to survive the vote, whose final results are expected after 1800 GMT (1 p.m. EST)

More volatile and commodity-linked currencies, such as the Australian dollar, also benefited from the weaker U.S. currency, with the Aussie up 0.2% at US$0.7698.

Rising commodity prices in recent months have boosted currencies of countries with large commodity exports, such as Australia and Canada.

Sterling rose 0.3% against the dollar to $1.3691.

The dollar rose 0.2% against the yen to 103.89 yen, although still consolidating in a narrow range after reaching a one-month high of 104.40 last week.

Emerging-market currencies were mostly higher but were some way off recent highs.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci and Jonathan Oatis