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Potential Vaccine Boosts Risk Sentiment

2 July 2020

The dollar was on the defensive in early European trade Thursday, with traders turning to perceived riskier currencies amid optimism surrounding a potential Covid-19 vaccine as well as solid economic data.

At 3:05 AM ET (0705 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 97.013. EUR/USD was up 0.2% at 1.1272, GBP/USD rose 0.2% to 1.2493, while USD/JPY was largely flat at 107.50. 

News emerged late Wednesday that a potential Covid-19 vaccine developed by Pfizer (NYSE:PFE) and Biontech (NASDAQ:BNTX) produced positive results in early-stage human trials, raising optimism that an antidote to the virus which has infected over 10 million and killed over 500,000 people can be found.

This followed economic data which had suggested that a global recovery is starting to gain momentum:  U.S. manufacturing activity rebounded more than expected in June, with the manufacturing activity index by the Institute for Supply Management, released Wednesday, hitting its highest in 14 months. Similar surveys from China, Germany and France all rebounded too.

Attention will now shift to the official U.S. employment report, due at 8:30 AM ET (1230 GMT) - a day early due to Friday’s U.S. public holiday - which is expected to show an increase of 3 million nonfarm payrolls in June.

However, it’s debatable whether the U.S. economy can sustain its recovery as coronavirus infections surge in many states -- Arizona, California, North Carolina, Tennessee and Texas all had record-high new case reports on Wednesday -- resulting in rolled back efforts to reopen their economies.

“We are more nervous about the July [nonfarm payrolls] figure that will be published in early August, which could significantly disappoint markets,” said analysts at ING, in a research note. “If renewed containment measures across numerous states make it unviable for businesses to operate then it will only add to the problems in the jobs market.”

St. Louis Federal Reserve Bank president James Bullard offered up a grave warning about the financial implications if the coronavirus outbreak isn’t contained.

"Without more granular risk management on the part of the health policy, we could get a wave of substantial bankruptcies and (that) could feed into a financial crisis," Bullard said in an interview with the Financial Times newspaper on Wednesday.

"If we see further spikes in coronavirus cases, I would expect both the dollar and the yen to strengthen against other currencies," said Tohru Sasaki, head of Japan market research at J.P. Morgan, in a Reuters report.



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