By Peter Nurse
Investing.com - The dollar gained in early European trade Wednesday, with the sharp selloff in U.S. equity markets prompting traders to ditch riskier currencies in favor of the world's reserve currency.
At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 93.562. The index has risen just short of 1% over the last week, climbing from the more than two-year lows it touched earlier in the month.
"The tech selloff has caught the market by surprise and it is a bit jittery as to whether there are broader implications," said Bank of Singapore currency analyst Moh Siong Sim, in a Reuters report.
"It might force some position unwinding in other parts of the market, and that's probably what we're seeing right now," he said.
EUR/USD slipped 0.1% to 1.1768, continuing to retreat from the 1.20 level it briefly touched last week before European Central Bank chief economist Philip Lane’s comments that the exchange rate mattered to monetary policy.
With this in mind, Thursday’s ECB meeting looms large, with investors looking to closely monitor any comments on the euro given it has still risen 10% since coronavirus lockdowns started in March, even with the recent retreat.
“We think it is too early for the ECB to forcefully talk down the euro this week,” analysts at ING said, in a research note. “We don’t look for Trichet-like comments on a ‘brutal’ EUR appreciation. Rather, President Christine Lagarde may highlight that the central bank monitors the euro closely while reiterating that the exchange rate isn't seen as a target.”
Elsewhere, worries about Brexit trade negotiations have pushed the pound down to levels last seen at the end of July. GBP/USD dipped 0.4% to $1.2939, while EUR/GBP rose 0.3% to 0.9093.
Britain will set out its blueprint for life outside the European Union later Wednesday, publishing legislation a government minister acknowledged would break international law in a "specific and limited way".
This is unlikely to be received favorably in European circles, increasing the likelihood of a messy end to the post-Brexit transition period at the end of the year.
“While we still see an above 50% probability of a deal, the lack of risk premia priced in suggests further downside to the currency in coming weeks, particularly if little progress is made ahead of the 15 October deadline,” said ING, in a research note.