FOREX-Dollar pauses its decline on fresh virus worries

* Dollar flat after rebounding on soft European data
* Concerns about COVID-19 variant, vaccines dampen mood
* Dollar bears expect Fed to reaffirm dovish stance this
week
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Hideyuki Sano
TOKYO, Jan 25 (Reuters) - The U.S. dollar stabilised on
Monday after a recent decline as fresh worries about the
coronavirus and the global economy prompted investors to hang on
to the safe-haven currency.
But analysts said the dollar could resume its fall if the
U.S. Federal Reserve reaffirms its commitment to a highly
accommodative monetary policy at its rate meeting later this
week -- as widely expected.
"I don't think the Fed has any incentives to curtail its
stimulus at this point, even though some market players may try
to read between the lines for any signs of tapering in
stimulus," said Kazushige Kaida, head of FX sales at State
Street Bank's Tokyo Branch.
"I think the dollar is staying in a downtrend even though it
is marking time for now," he said.
Federal Reserve Chair Jerome Powell is expected to signal he
has no plan to wind back the Fed's massive stimulus any time
soon when the central bank concludes its policy review on
Wednesday.
The dollar index stood at 90.172 =USD , flat on the day. It
bounced back on Friday after hitting 90.043 on Thursday, last
week's lowest level.
Economic activity in the euro zone shrank markedly in
January as stringent lockdowns to contain the COVID-19 pandemic
hit the bloc's dominant service industry hard while UK data
showed British retailers struggled to recover in December.
British Prime Minister Boris Johnson also said on Friday
there was evidence a new variant of COVID-19 discovered late
last year could be associated with higher mortality, while
problems in some vaccine roll-outs also weighed on sentiment.
Downbeat coronavirus news overshadowed some upbeat U.S.
data, including a surge in manufacturing and an unexpected jump
in existing home sales. Bets against the dollar have become overcrowded, analysts
also said, with U.S. data on Friday showing net dollar short
positions swelling to the largest since May 2011. The euro was little changed at $1.2174 EUR= , taking a
pause after a 0.8% gain last week.
The common currency is capped in part by signs of political
instability in Rome, which has also driven Italian bond yields
higher. The yield spread between Italian and German bonds hit
its highest since November on Friday.
Italy's main ruling parties on Friday flagged snap elections
as the only way out of its political impasse, if Prime Minister
Giuseppe Conte fails to drum up a parliamentary majority after
scraping through a confidence vote. The situation in Italy demonstrates the widespread risks of
political instability from popular discontent as communities
grow weary of the pandemic, some analysts said.
"The stock markets' rally during this pandemic is completely
dependent on fiscal expansion and debt monetisation by central
banks," said Makoto Noji, chief currency strategist at SMBC
Nikko Securities. "Political instability could delay fiscal
measures. The year 2021 will not be the same as 2020."
In Washington, the honeymoon after Joe Biden's inauguration
as President last week means investors are hopeful that at least
a part of his $1.9 trillion coronavirus relief plan will come
through fairly soon. The second impeachment trial of former U.S. President Donald
Trump expected early next month could complicate his efforts.
Elsewhere, the British pound held firm at $1.3684 GBP=D4 ,
not far off a 2-1/2-year high of $1.3745 touched on Thursday
thanks in part to Britain's lead in COVID-19 vaccinations.
Against the yen, the dollar was flat at 103.76 yen JPY= .

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