Dollar strengthens as vaccine, stimulus hopes dim

NEW YORK (Reuters) - The U.S. dollar strengthened on Tuesday as investors turned cautious after a Johnson & Johnson COVID-19 study was paused and as hopes dimmed that a fiscal stimulus package could be reached before the presidential election.

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Major equity averages were lower, partly due to a decline in J&J shares after the company paused its study due to an unexplained illness in a participant, dampening optimism about a vaccine. Eli Lilly also said its clinical trial for a COVID-19 antibody treatment was paused.

U.S. consumer prices rose 0.2% in September, matching expectations, for a fourth straight monthly climb, though the pace has slowed amid considerable slack in the economy as it slowly recovers from a nadir caused by coronavirus shutdowns.

The dollar index rose 0.528% against a basket of other currencies, putting it on track for its biggest daily percentage gain in three weeks.

The U.S. currency’s safe-haven appeal has been curbed by growing expectations that a win by former U.S. Vice President Joe Biden on Nov. 3 would bring large stimulus for the pandemic-hit economy, bolstering the stock market and investor risk appetite.

“It’s becoming increasingly evident to people that there is no stimulus coming before the election,” said Erik Nelson, a currency strategist at Wells Fargo in New York.

“I wouldn’t say markets were fully pricing stimulus or fully pricing a vaccine by the end of the year but they were probably tilted towards the more positive side of those expectations.”

The greenback has held within a range of about 2% over the past three weeks as talks on a fiscal deal have progressed in fits and starts. Majority Leader Mitch McConnell said the Republican-led U.S. Senate would vote on a scaled-down coronavirus economic relief bill of the type Democrats have rejected as they hold out for trillions in aid.

The euro was down 0.59% to $1.1745 while the Japanese yen weakened 0.17% versus the greenback.

Sterling was last trading at $1.2938, down 0.96%, after climbing above the $1.30 mark for the first time in a month on Friday as Britain’s unemployment rate rose by more than expected to 4.5% in the three months to August.

In addition, as a deadline draws closer, British Prime Minister Boris Johnson told his top cabinet ministers on Tuesday he wanted a free trade deal with the European Union on the right terms but ending the year without one held “no fear.”

Reporting by Chuck Mikolajczak; Editing by Sonya Hepinstall