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* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E
By Ritvik Carvalho
LONDON, March 24 (Reuters) - The dollar edged down from
four-month highs on Wednesday as better-than-expected purchasing
manager surveys from Britain and Europe offset concerns over a
third COVID-19 wave in Europe, potential U.S. tax hikes and
rising tensions between the West and China, which sapped risk
appetite overnight.
Euro zone business activity unexpectedly grew this month, a
preliminary survey showed, but with much of Europe suffering a
third wave of coronavirus infections and renewed lockdown
measures, that may not last through April. Factories ramped up output at the fastest monthly pace in
over 23 years, countering a continuing slowdown in the dominant
services industry, which is more vulnerable to lockdowns and the
region's slow vaccine rollout.
IHS Markit's flash composite PMI, seen as a good guide to
economic health, climbed above the 50 mark separating growth
from contraction, to 52.5 in March compared with February's
48.8, its highest since late 2018.
The PMI saw the dollar index =USD pull back from a
four-month high of 92.608 hit in early London trade, trading at
the 92.454 mark around midday.
"(COVID-19 third wave concern) was the real driving force
... but ultimately we've seen that negativity pushed back by the
context of the flash PMI's we've seen this morning across the
euro zone and the UK, which have been much more constructive,"
said Jeremy Stretch, head of CIBC FX strategy.
"Markets are looking for forward-looking indicators and this
is reflective of a presumption that Q2 will be materially better
than Q1 and that plays back into the reflation narrative, which
was being questioned by the market in the overnight session."
Stretch added that he doesn't expect the dollar to
strengthen materially from here, and that he expects commodity
currencies such as the Australian and New Zealand dollars to
gain.
The index that measures the dollar'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 "counter-trend 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
counter-cyclical 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. The overnight flight to safety got 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 and Fed Chair Jerome 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, added to market concerns overnight. 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., before recovering.
The British pound weakened as far as $1.3675, also the
lowest since early February.
In cryptocurrencies, bitcoin BTC=BTSP gained 4.7% to
$56,870, off a record high of $61,781.83.
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