The US dollar weakened against the euro and pound on Wednesday, sending sterling back towards $1.30, as persistent concerns over the economic fallout from coronavirus piles pressure on the US currency.

The dollar index, which tracks the US currency against half a dozen of its peers, fell 0.2 per cent, taking its losses for the month to nearly 4 per cent.

The decline comes as traders price in rock-bottom interest rates in the US for the next few years, with the Federal Reserve expected to leave rates close to zero after its policy meeting today.

The drop in US yields, with the 10-year Treasury yield back near historic lows, has increased the appeal of other currencies. The euro gained 0.4 per cent to $1.1759 while the British pound advanced 0.4 per cent to $1.2986. It last topped $1.30 in early March.

The Fed is expected to remain accommodative as high-frequency indicators show the US economic recovery following the initial easing of the March lockdowns may be ebbing. Several states have reversed plans to reopen their economies after a surge in Covid-19 cases.

The US reported 1,121 coronavirus deaths on Tuesday, taking the seven-day average death toll above 1,000. The $1tn pandemic relief package proposed by Senate Republicans has encountered intense resistance from Democrats, who oppose cutting enhanced unemployment benefits from $600 a week to just $200 a week.

“It is a slippery slope for global macro risk as the US economic data starts to show signs of moderation in the recovery path,” Citigroup’s foreign exchange analysts said in a note. “This is probably reflecting the move back to partial lockdown mode in some important states.”

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The bank said it expected the Fed would remain “as accommodative as it can . . . lending an important weakening bias to the dollar”.

Global stocks rose ahead of the US monetary policy decision. The benchmark S&P 500 rose 0.7 per cent, with the advance led by Apple, Microsoft and Amazon ahead of the release of further tech company quarterly results this week. The technology-heavy Nasdaq Composite climbed 1 per cent.

European stock markets were largely flat, with the Euro Stoxx 600 down less than 0.1 per cent.

Line chart of USD index, showing US dollar has extended its slide to a two-year low

Peter Schaffrik, global macro strategist at RBC, said the announcement by the Fed on Wednesday on its latest monetary policy meeting was unlikely to produce anything groundbreaking.

Investors do not expect the Fed to resort to negative interest rates but some suspect it could turn to unconventional measures such as yield curve control, where it could set upper limits on short-term Treasury yields.

“In coming months, we expect the committee to detail how the economy would have to evolve in order for it to become comfortable adjusting policy,” said Mr Schaffrik. “Perhaps, [Fed chair Jay] Powell will provide some additional colour on what this might look like at his press conference.”

In the Asia-Pacific region, Japan’s Topix index closed 1.3 per cent lower. China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed stocks jumped 2.4 per cent and Hong Kong’s Hang Seng rose 0.5 per cent.

Traders in China said the stock market gains were driven by renewed interest from retail investors. State media last week warned that stocks were rising too quickly.

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Gold pulled back to $1,947 per troy ounce, after hitting its all-time high on Tuesday. Goldman Sachs lifted its 12-month forecast for gold to $2,300 per troy ounce, from $2,000. “We have long maintained gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” the bank said.

Oil prices rose but remained rangebound, with Brent crude, the international benchmark, up 1.1 per cent at $43.71 per barrel.

Via Financial Times