FOREX-Dollar hits 4-month high as worries over European lockdowns, U.S. taxes sap risk appetite

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Ritvik Carvalho
LONDON, March 24 (Reuters) - The dollar hit a four-month
high on Wednesday as concerns over a third COVID-19 wave in
Europe, potential U.S. tax hikes and escalating tensions between
the West and China sapped risk appetite.
The dollar index =USD rose to a four-month top of 92.608
in early London trade, its highest since Nov. 23.
The gauge "looks determined to test the top end of a new,
higher 91-93 range we think will form in coming weeks," Westpac
strategists wrote in a client note, adding that extended
lockdowns in Europe have sapped confidence in an economic
rebound.
"Meanwhile, the U.S. will have an impressive rebound in
coming months amid a strong vaccine roll-out, stimulus payments
and economic reopenings," they said.
The index that measures the greenback's strength against a
basket of peer currencies is up nearly 3% year-to-date,
confounding widely held expectations among analysts for a
decline.
Strategists at BCA Research said they believe the U.S.
dollar is experiencing a "countertrend rally within a bear
market."
"Over the near-term, the dollar benefits from two supports.
First, the U.S. growth will outperform thanks to generous fiscal
policy and the country's lead in vaccinations. Second, the
NASDAQ and other highflying global equities have been correcting
since February, creating some risk-off undertones that help the
countercyclical greenback."
"However, real interest rate differentials will ultimately
determine the currency's cyclical outlook. The Fed's commitment
to maintaining an accommodative policy will cap upside to US
real rates at the short-end of the curve. This will prevent a
sharp appreciation in the dollar.
The euro EUR= hit a four-month low of $1.1812 after
Germany extended a lockdown and urged its citizens to stay at
home during the Easter holiday. Worries over the pace of the pandemic recovery were
heightened after a U.S. health agency said the AstraZeneca (NASDAQ:AZN) Plc
AZN.L vaccine may have included outdated information in its
data.
The flight to safety received an additional nudge when
Treasury Secretary Janet Yellen told lawmakers that future tax
hikes will be needed to pay for infrastructure projects and
other public investments.
Yellen was testifying to the House Financial Services
Committee along with Federal Reserve Chair Jerome Powell, who
reiterated that an expected near-term spike in inflation will be
transitory. That helped tame U.S. Treasury yields, with the benchmark
US10YT=RR sinking below 1.6% on Wednesday for the first time
in a week, as it continued its retreat from a more than one-year
high of 1.7540% touched last week.
Both Yellen and Powell are also scheduled to testify to the
Senate Banking Panel on Wednesday.
Human rights sanctions on China imposed by the United
States, Europe and Britain, which prompted retaliatory sanctions
from Beijing, are adding to market concerns. The safe-haven yen JPY= , which gained in Asian trade,
weakened 0.1% by the start of trading in London. Australia's
dollar AUD= - considered a liquid proxy for risk - weakened
further on Wednesday.
The Aussie slipped to as low as $0.7582, a level not seen
since Feb. 5.
The British pound weakened as far as $1.3675, also the
lowest since early February.
In cryptocurrencies, bitcoin BTC=BTSP gained 4% to
$56,500, off a record high of $61,781.83.
Seasonal factors are likely exacerbating currency moves, as
some investors lock in profits ahead of the quarter-end and the
holidays of Easter and Passover, according to Masafumi Yamamoto,
chief currency strategist at Mizuho Securities.
"The main scenario for the market, that the global economy
is recovering from the pandemic shock, is intact," he said.
"We may see more of a correction into the start of April,
but after that I expect a restarting of a risk-on trade," with
commodity currencies of advanced economies benefitting most, he
said.

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